Financial Globalization and Bank Lending: The Limits of Domestic Monetary Policy?

Cao, Jin; Dinger, Valeriya

doi:10.2139/ssrn.3130089

Cited by 10 publications

(13 citation statements)

References 14 publications

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“…Prudential policy can be used as an additional tool to balance these trade‐offs, by potentially shielding countries from the global financial cycle and reducing their sensitivity to global shocks, as discussed for instance in Bruno and Shin (2015), Takáts and Temesvary (2019) and Coman and Lloyd (2019). Extending Bruno and Shin (2015) and Rey (2015), Cao and Dinger (2018) find empirically that monetary policy in small‐open economies may be limited by global financial flows, especially during monetary tightening; thus, implying a need for prudential measures to “lend a hand” to monetary policy in containing credit booms. This finding echoes theoretical results established by Mimir and Sunel (2019) using a model capturing financial market imperfections in open emerging market economies.…”

Section: Literaturementioning

confidence: 91%

The interaction between macroprudential policy and monetary policy: Overview

Bussière

Cao²,

Haan

et al. 2020

Rev International Economics

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This paper presents the main findings of an International Banking Research Network initiative examining the interaction between monetary policy and macroprudential policy in determining international bank lending. We give an overview on the data, empirical specifications and results of the seven papers from the initiative. The papers are from a range of core and smaller advanced economies, and emerging markets . The main findings are as follows. First, there is evidence that macroprudential policy in recipient countries can partly offset the spillover effects of monetary policy conducted in core countries. Meanwhile, domestic macroprudential policy in core countries can also affect the cross‐border transmission of domestic monetary policy via lending abroad, by limiting the increase in lending by less strongly capitalized banks. Second, the findings highlight that studying heterogeneities across banks provides complementary insights to studies using more aggregate data and focusing on average effects. In particular, we find that individual bank characteristics such as bank size or GSIB status play a first‐order role in the transmission of these policies. Finally, the impacts differ considerably across prudential policy instruments, which also suggests the importance of more granular analysis.

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Section: Literaturementioning

confidence: 91%

The interaction between macroprudential policy and monetary policy: Overview

Bussière

Cao²,

Haan

et al. 2020

Rev International Economics

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show abstract

“…As suggested by Cao and Dinger (2018), for Norway, the foreign-domestic interest rate differentials are not fully neutralized by the exchange rate dynamics. Using the differentials between LIBOR and NIBOR, adjusted by the changes in USD / NOK spot / forward ex-change rate, as a measure of the cost advantage of U.S. dollar funding (intrinsically, deviation of USD / NOK spot / forward exchange rate from what is predicted by uncovered interest rate parity (UIP) / covered interest rate parity (CIP)), we find that such cost advantage is persistently high for certain periods.…”

Section: Norwaymentioning

confidence: 94%

“…In this section, we zoom into country-specific channels to better understand our baseline results. For Norway, we focus on how the fact (documented in Cao and Dinger (2018)) that exchange rate dynamics does not fully offset monetary policy differentials affects the interaction between foreign monetary policy and macroprudential regulation. This channel is not a force for Sweden, since exchange rates roughly offset interest rate differentials.…”

Section: Norwaymentioning

confidence: 99%

“…We also compare the effects of foreign monetary policy surprises to those of domestic monetary policies. We examine these questions using bank‐level data from two small open economies, Norway and Sweden, which both have a substantial share (about one third for Norway and half for Sweden) of bank funding denominated in foreign currencies and are thus likely to be particularly prone to foreign monetary policy spillovers (Cao & Dinger, 2018). More specifically, we test how bank lending reacts to unexpected foreign monetary policy changes, focusing on spillovers from the United States, the Euro Area, and the United Kingdom.…”

Section: Introductionmentioning

confidence: 99%

“…(2019). For Norway, Cao and Dinger (2018) document the impact of foreign monetary policy, which determines the cost of bank funding in foreign currency, on domestic lending after controlling for exchange rate dynamics.…”

Section: Introductionmentioning

confidence: 99%

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