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International Spillovers and Local Credit Cycles

Yusuf Baskaya (), Julian di Giovanni, Sebnem Kalemli-Özcan and Mehmet Ulu

No 953, Working Papers from Barcelona Graduate School of Economics

Abstract: Most capital inflows are intermediated by domestic banks. We use transaction-level data on bank credit to estimate the causal impact of capital inflows on lending. The key mechanism is a failure of UIP, where capital inflows due to increases in global risk-appetite lead domestic banks to lower borrowing rates. Our estimates explain 43% of observed credit growth, where bank heterogeneity is critical for the aggregate impact. Foreign banks, exchange-rate driven balance-sheet shocks, and the relaxation of firm-level collateral constraints cannot account for our large estimates. Textbook- models, where UIP holds and capital flows are endogenous to demand cannot explain our findings.

Keywords: Capital flows; VIX; risk premium; bank credit; firm heterogeneity (search for similar items in EconPapers)
JEL-codes: E0 F0 F1 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-mac
Date: 2017-02
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Working Paper: International Spillovers and Local Credit Cycles (2017) Downloads
Working Paper: International Spillovers and Local Credit Cycles (2017) Downloads
Working Paper: International Spillovers and Local Credit Cycles (2017) Downloads
Working Paper: International spillovers and local credit cycles (2017) Downloads
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