Cross-Border Spillovers of Monetary Policy: What Changes During a Financial Crisis?

Abstract

This paper analyses cross-border spillovers of monetary policy by examining two countries that were in the eye of the storm during the euro area sovereign debt crisis, namely Ireland and Portugal. The research provides insight as to how banking and sovereign stress affect the inward transmission of foreign monetary policy to two economies that share many characteristics, but that also have many distinct features. In particular, our research addresses the question of whether a banking system in distress reacts more or less to monetary policy changes in other major economies. The empirical analysis indicates that international spillovers are present for US and UK monetary policy for both Ireland and Portugal, but there is heterogeneity in the transmission mechanisms by which they affect credit growth in the two economies.

The International Transmission of Monetary Policy

“… See Argimon, Bonner, Correa, Duijm, Frost, de Haan, de Haan, and Stebunovs (2017);Auer, Friedrich, Ganarin, Peligrova and Towbin (2017);Avdjiev, Koch, McGuire, and von Peter (2017);Barbosa, Bonfim, Costa and Everett (2017);Gajewski, Jara, Kang, Mok, Moreno, and Serwa (2017);Gräb and Zochowski (2017);Hills, Ho, Reinhardt, Sowerbutts, Wong and Wu (2017);Kruglova and Styrin (2017); Loeffler, Segalla, Valitova and Vogel (2017);and Schmidt, Caccavaio, Carpinelli and Marinelli (2017).…”

Spillover effects of the US monetary policy normalization on African stock markets

“…Recent empirical studies on international spillovers used different methodologies. For instance, Apostolou and Beirne (2019) used a two-step GARCH-in-mean approach, Hanisch (2019) used a multi-country structural dynamic factor model, Rohit and Dash (2019); Timmer (2018) and Barbosa et al (2019) use the global Var, while Albagli et al (2019) and Avdjiev and Hale (2019) used panel technique. Bhattarai et al (2019) used the Panel Var that US monetary policy shock has negative effect on stock prices and exchange rates in fourteen emerging market economies.…”

“…Bhattarai et al (2019) used the Panel Var that US monetary policy shock has negative effect on stock prices and exchange rates in fourteen emerging market economies. Barbosa et al (2019) analyse that cross-border spillovers of monetary policy on sovereign debt crisis in Ireland and Portugal through credit growth and that monetary policy spillover from the US and UK affect the two countries through a heterogeneous transmission mechanisms. Rohit and Dash (2019) examine the role of exchange rate regimes in explaining monetary policy spillover across advanced and emerging economies.…”

The interaction between macroprudential and monetary policies: The cases of Norway and Sweden

“…With regard to empirical studies on the presence of the bank lending and portfolio channels of foreign monetary policy shocks, Lindner et al (2019) find limited evidence for the importance of foreign monetary policy transmission through banks for Austria and Germany. On the contrary, Hills et al (2019) establish evidence for the bank funding and bank portfolio channel in the transmission of foreign monetary policies in Hong Kong and the U.K., as do Barbosa et al (2018) for Ireland and Portugal. Auer et al (2019) discuss the role of international portfolio channel for Switzerland.…”

“…The second channel brought forward is the portfolio channel that has different predictions regarding domestic lending. A tightening of foreign monetary policy may reduce the creditworthiness of foreign borrowers and reduce their collateral values, which may induce banks to reshuffle their portfolios away from foreign assets and towards domestic assets (see Barbosa et al (2018), Hills et al (2019)), hence increase domestic lending. This channel has been also called the international substitution effect in Avdjiev et al (2018).…”