International Bank Lending Channel of Monetary Policy
62 Pages Posted: 3 Dec 2019
Date Written: November 2019
How does domestic monetary policy in systemic countries spillover to the rest of the world? This paper examines the transmission channel of domestic monetary policy in the cross-border context. We use exogenous shocks to monetary policy in systemically important economies, including the U.S., and local projections to estimate the dynamic effect of monetary policy shocks on bilateral cross-border bank lending. We find robust evidence that an increase in funding costs following an exogenous monetary tightening leads to a statistically and economically significant decline in cross-border bank lending. The effect is weakened during periods of high uncertainty. In contrast, the effect is found to not vary according to the degree of borrower country riskiness, further weakening support for the international portfolio rebalancing channel.
Keywords: Central banking and monetary issues, Monetary policy instruments, Central bank role, Interest rate differential, Central banks, Monetary policy spillovers, International bank lending channel, Cross-border banking flows, Global financial cycles, Local projections, WP, recipient country, cross-border, projection method, policy action, Gertler
JEL Classification: E52, F21, F32, F42, G21, E01, F3, O24
Suggested Citation: Suggested Citation