The macro-financial effects of international bank lending on emerging markets

Iñaki Aldasoro, Paula Beltrán, Federico Grinberg and Tommaso Mancini-Griffoli

No 899, BIS Working Papers from Bank for International Settlements

Abstract: Banking flows to emerging market economies (EMEs) are a potential source of vulnerability capable of generating boom-bust cycles. The causal effect of such inflows on EME macro-financial conditions is hard to pin down empirically and should be key to well-informed policy design. We provide novel empirical evidence on the effects of cross-border bank lending on EMEs macro-financial conditions. We identify causal effects by leveraging the heterogeneity in the size distribution of bilateral cross-border bank lending to construct granular instrumental variables for aggregate cross-border bank lending to 22 EMEs. We find that cross-border bank credit causes higher domestic activity in EMEs through looser financial conditions. Financial condition indices ease, nominal and real effective exchange rates appreciate, sovereign and corporate spreads narrow, and domestic interest rates fall. At the same time, real domestic credit grows, real GDP expands, imports rise, and housing prices increase as well. E ects are weaker for countries with relatively higher levels of capital inflow controls, supporting the view that these policy measures can be effective in dampening the vulnerabilities associated with external funding shocks.

Keywords: granular instrumental variables; capital flows; emerging markets; cross-border claims; credit shocks; international banking; capital controls. (search for similar items in EconPapers)
JEL-codes: E0 F0 F3 (search for similar items in EconPapers)
Pages: 66 pages
Date: 2020-11
New Economics Papers: this item is included in nep-ban, nep-ifn, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: The macro-financial effects of international bank lending on emerging markets (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:899

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