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Reserve Accumulation and Bank Lending: Evidence from Korea

Youngjin Yun ()
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Youngjin Yun: Economic Research Institute, The Bank of Korea

No 2018-15, Working Papers from Economic Research Institute, Bank of Korea

Abstract: Reserve accumulation is funded by the central bank's domestic borrowing as it always sterilizes reserve purchases by increasing domestic liabilities. The central bank borrowing could crowd out firms' borrowing under imperfect international capital mobility. I present a model that illustrates the mechanism and examine monthly balance sheets of Korean banks from September 2003 to August 2008 to find that bank lending to firms did decline after reserve accumulation. Controlling for individual effects and time effects, it is estimated that bank lending declined by 50 cents after one additional dollar of reserve accumulation. A causal relationship is verified by differences-in-differences identification. After one standard deviation reserve accumulation shock, primary dealer banks and foreign bank branches cut lending growth by 0.4 and 1.6 percentage points more than non-primary dealer banks and domestic banks, respectively.

Keywords: Foreign exchange reserves; Sterilization; Crowding-out; Bank loans (search for similar items in EconPapers)
JEL-codes: E22 E58 F31 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2018-06-01
New Economics Papers: this item is included in nep-mac and nep-mon
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