Granular banking flows and exchange-rate dynamics

Balduin Bippus (bb528@cam.ac.uk), Simon Lloyd and Daniel Ostry
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Balduin Bippus: University of Cambridge

No 1043, Bank of England working papers from Bank of England

Abstract: Using data on the external assets and liabilities of global banks based in the UK, the world’s largest centre for international banking, we identify exogenous cross-border banking flows by constructing novel granular instrumental variables. In line with the predictions of a new granular international banking model, we show empirically that cross-border flows have a significant causal impact on exchange rates. A 1% increase in UK-based global banks’ net external US dollar-debt position appreciates the dollar by 2% against sterling. While we estimate that the supply of dollars from abroad is price-elastic, our results suggest that UK-resident global banks’ demand for dollars is price-inelastic. Furthermore, we show that the causal effect of banking flows on exchange rates is state dependent, with effects twice as large when banks’ capital ratios are one standard deviation below average. Our findings showcase the importance of banks’ risk-bearing capacity for exchange-rate dynamics and, therefore, for insulating their domestic economies from global financial shocks.

Keywords: Capital flows; exchange rates; financial frictions; granular instrumental variables; international banking (search for similar items in EconPapers)
JEL-codes: E00 F00 F30 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2023-09-22
New Economics Papers: this item is included in nep-ban, nep-ifn and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Granular Banking Flows and Exchange-Rate Dynamics (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:1043

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