International Fiscal-financial Spillovers: The Effect of Fiscal Shocks on Cross-border Bank Lending

Sangyup Choi, Davide Furceri and Chansik Yoon ()
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Chansik Yoon: Princeton University

No GRU_2020_025, GRU Working Paper Series from City University of Hong Kong, Department of Economics and Finance, Global Research Unit

Abstract: 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 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 and the size of the effect is comparable to an exogenous decline in the federal funds rate by about 25bp (50bp) for spending (revenue) shocks. The fiscal-financial spillovers we find are independent of changes in monetary policy or financial conditions measured by the VIX. The effects also depend on the sign of the fiscal shocks and the underlying economic conditions of a source country. While capital controls seem to play some moderating role, we do not find systematic and statistically significant differences in the spillover effects across recipient countries, depending on their exchange rate regime. The extension of the analysis to fiscal shocks for a panel of 16 small open economies largely confirms the U.S. economy’s findings.

Keywords: Fiscal-financial spillovers; Cross-border banking flows; Local projections; Nonlinear effects; Trilemma (search for similar items in EconPapers)
JEL-codes: E62 F21 F32 F42 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2020-10-20
New Economics Papers: this item is included in nep-ifn and nep-mac
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https://www.cb.cityu.edu.hk/ef/doc/GRU/WPS/GRU%232020-025%20Choi.pdf (application/pdf)

Related works:
Journal Article: International Fiscal-Financial Spillovers:the Effect of Fiscal Shocks on Cross-Border Bank Lending (2021)
Working Paper: International Fiscal-financial Spillovers: The Effect of Fiscal Shocks on Cross-border Bank Lending (2020)
Working Paper: International Fiscal-financial Spillovers: The Effect of Fiscal Shocks on Cross-border Bank Lending (2019)
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