Granular Banking Flows and Exchange-Rate Dynamics

Balduin Bippus, Simon Lloyd and Daniel Ostry

Janeway Institute Working Papers from Faculty of Economics, University of Cambridge

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 exchangerate dynamics and, therefore, for insulating their domestic economies from global financial shocks.

Keywords: Capital flows; Exchange Rates; Granular instrumental variables; International banking (search for similar items in EconPapers)
JEL-codes: E00 F00 F30 (search for similar items in EconPapers)
Date: 2023-09-04
New Economics Papers: this item is included in nep-fdg and nep-opm
Note: bb528, dao33
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.janeway.econ.cam.ac.uk/working-paper-pdfs/jiwp2314.pdf

Related works:
Working Paper: Granular banking flows and exchange-rate dynamics (2023)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cam:camjip:2314

Access Statistics for this paper

More papers in Janeway Institute Working Papers from Faculty of Economics, University of Cambridge
Bibliographic data for series maintained by Jake Dyer ().