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International credit supply shocks

Ambrogio Cesa-Bianchi (), Andrea Ferrero () and Alessandro Rebucci ()
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Ambrogio Cesa-Bianchi: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Andrea Ferrero: University of Oxford
Alessandro Rebucci: John Hopkins University Carey Business School

No 680, Bank of England working papers from Bank of England

Abstract: House prices and exchange rates can potentially amplify the expansionary effect of capital inflows by inflating the value of collateral. We first set up a model of collateralized borrowing in domestic and foreign currency with international financial intermediation in which a change in leverage of global intermediaries leads to an international credit supply increase. In this environment, we illustrate how house price increases and exchange rates appreciations contribute to fuelling the boom by inflating the value of collateral. We then document empirically, in a Panel VAR model for 50 advanced and emerging countries estimated with quarterly data from 1985 to 2012, that an increase in the leverage of US Broker-Dealers also leads to an increase in cross-border credit flows, a house price and consumption boom, a real exchange rate appreciation and a current account deterioration consistent with the transmission in the model. Finally, we study the sensitivity of the consumption and asset price response to such a shock and show that country differences are associated with the level of the maximum loan-to-value ratio and the share of foreign currency denominated credit.

Keywords: Cross-border claims; capital flows; credit supply shock; leverage; exchange rates; house prices; international financial intermediation (search for similar items in EconPapers)
JEL-codes: C32 E44 F44 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-ifn, nep-mac, nep-mon and nep-opm
Date: 2017-10-06
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0680

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