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Monetary Policy and Global Banking

Falk Bräuning and Victoria Ivashina

No 23316, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: When central banks adjust interest rates, the opportunity cost of lending in local currency changes, but—in absence of frictions—there is no spillover effect to lending in other currencies. However, when equity capital is limited, global banks must benchmark domestic and foreign lending opportunities. We show that, in equilibrium, the marginal return on foreign lending is affected by the interest rate differential, with lower domestic rates leading to an increase in local lending, at the expense of a reduction in foreign lending. We test our prediction in the context of changes in interest rates in six major currency areas.

JEL-codes: E44 E52 F31 G21 (search for similar items in EconPapers)
Date: 2017-04
New Economics Papers: this item is included in nep-ban, nep-cba, nep-ifn, nep-mac, nep-mon and nep-opm
Note: CF IFM
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Published as Falk Bräuning & Victoria Ivashina, 2020. "Monetary Policy and Global Banking," Journal of Finance, American Finance Association, vol. 75(6), pages 3055-3095, December.

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Journal Article: Monetary Policy and Global Banking (2020) Downloads
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