Silvia Albrizio, Sangyup Choi, Davide Furceri, and Chansik Yoon
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.
We estimate world cycles using a new quarterly dataset of output, credit and asset prices assembled using IMF archives and covering a large set of advanced and emerging economies since 1950. World cycles, both real and financial, exist and are generally driven by US shocks. But their impact is modest for most countries. The global financial cycle is also much weaker when looking at credit rather than asset prices. We also challenge the view that syncronization has increased over time. Although this is true for prices (goods and assets), this not true for quantities (output and credit). The world business and credit cycles were as strong during Bretton Woods (1950–1972) as during the Globalization period (1984-2006). For most countries, the way their output co-moves with the rest of the world has changed little over the last 70 years. We discuss the reasons behind these new findings and their policy implications for small open economies.
This paper sheds new light on the degree of international fiscal-financial spillovers by investigating the effect of domestic fiscal policies on cross-border bank lending. By estimating the dynamic response of U.S. cross-border bank lending towards the 45 recipient countries to exogenous domestic fiscal shocks (both measured by spending and revenue) between 1990Q1 and 2012Q4, we find that expansionary domestic fiscal shocks lead to a statistically significant increase in cross-border bank lending. The magnitude of the effect is also economically significant: the effect of 1 percent of GDP increase (decrease) in spending (revenue) is comparable to an exogenous decline in the federal funds rate. We also find that fiscal shocks tend to have larger effects during periods of recessions than expansions in the source country, and that the adverse effect of a fiscal consolidation is larger than the positive effect of the same size of a fiscal expansion. In contrast, we do not find systematic and statistically significant differences in the spillover effects across recipient countries depending on their exchange rate regime, although capital controls seem to play some moderating role. The extension of the analysis to a panel of 16 small open economies confirms the finding from the U.S. economy.
We analyze the joint impact of macroprudential and capital control measures on cross-border banking
flows, while controlling for multidimensional aspects in lender-and-borrower-relationships
(e.g., distance, cultural proximity, microprudential regulations). We uncover interesting spillover
effects from both types of measures when applied either by lender or borrowing countries, with
many of them most likely associated with circumvention or arbitrage incentives. While lender
countries’ macroprudential policies reduce direct cross-border banking outflows, they are associated
with larger outflows through local affiliates. Direct cross-border inflows are higher in
borrower countries with more usage of macroprudential policies, and are linked to circumvention
motives. In the case of capital controls, most spillovers seem to be present through local affiliates.
We do not find evidence to support the idea that additional capital inflow controls could interact
with macro-prudential policies to mitigate cross-border spillovers.
Mr. Seung M Choi, Ms. Laura E. Kodres, and Jing Lu
This paper examines whether the coordinated use of macroprudential policies can help
lessen the incidence of banking crises. It is well-known that rapid domestic credit growth
and house price growth positively influence the chances of a banking crisis. As well, a
crisis in other countries with high trade and financial linkages raises the crisis probability.
However, whether such “contagion effects” can operate to reduce crisis probabilities when
highly linked countries execute macroprudential policies together has not been fully
explored. A dataset documenting countries’ use of macroprudential tools suggests that a
“coordinated” implementation of macroprudential policies across highly-linked countries
can help to stem the risks of widespread banking crises, although this positive effect may
take some time to materialize.
Mr. Heedon Kang, Mr. Francis Vitek, Ms. Rina Bhattacharya, Mr. Phakawa Jeasakul, Ms. Sònia Muñoz, Naixi Wang, and Rasool Zandvakil
This paper analyzes cross-border macrofinancial spillovers from a variety of
macroprudential policy measures, using a range of quantitative methods. Event study and
panel regression analyses find that liquidity and sectoral macroprudential policy measures
often affect cross-border bank credit, whereas capital measures do not. This empirical
evidence is stronger for tightening than for loosening measures, is distributed across credit
leakage and reallocation effects, and is generally regionally concentrated. Consistently,
structural model based simulation analysis indicates that output and bank credit spillovers
from sectoral macroprudential policy shocks are generally small worldwide, but are
regionally concentrated and economically significant for countries connected by strong
trade or financial linkages. This simulation analysis also indicates that countercyclical
capital buffer adjustments have the potential to generate sizeable regional spillovers.
The paper presents a simple framework for the analysis of the macroeconomic implications of de-cashing. Defined as replacing paper currency with convertible deposits, de-cashing would affect all key macroeconomic sectors. The overall macreconomic impact of de-cashing would depend on the balance of growth-enhancing and growth-constraining factors. Starting from a traditional saving-investment balance, the paper develops a four-sector macroeconomic framework. It is purely illustrative and is designed to provide a roadmap for a systematic evaluation of de-cashing. The framework is disaggregated into the real, fiscal, monetary, and external sectors and potential implications of de-cashing are then identified in each sector. Finally, the paper draws a balance on possible positive and negative macroeconomic implications of de-cashing, and proposes policies capable of augmenting its economic and social benefits, while reducing potential costs.