International Fiscal-financial Spillovers: The Effect of Fiscal Shocks on Cross-border Bank Lending

By Sangyup Choi, Davide Furceri, Chansik Yoon

July 12, 2019

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Sangyup Choi, Davide Furceri, and Chansik Yoon. International Fiscal-financial Spillovers: The Effect of Fiscal Shocks on Cross-border Bank Lending, (USA: International Monetary Fund, 2019) accessed November 9, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper sheds new light on the degree of international fiscal-financial spillovers by investigating the effect of domestic fiscal policies on cross-border bank lending. By estimating the dynamic response of U.S. cross-border bank lending towards the 45 recipient countries to exogenous domestic fiscal shocks (both measured by spending and revenue) between 1990Q1 and 2012Q4, we find that expansionary domestic fiscal shocks lead to a statistically significant increase in cross-border bank lending. The magnitude of the effect is also economically significant: the effect of 1 percent of GDP increase (decrease) in spending (revenue) is comparable to an exogenous decline in the federal funds rate. We also find that fiscal shocks tend to have larger effects during periods of recessions than expansions in the source country, and that the adverse effect of a fiscal consolidation is larger than the positive effect of the same size of a fiscal expansion. In contrast, we do not find systematic and statistically significant differences in the spillover effects across recipient countries depending on their exchange rate regime, although capital controls seem to play some moderating role. The extension of the analysis to a panel of 16 small open economies confirms the finding from the U.S. economy.

Subject: Bank credit, Cross-border banking, Exchange rate arrangements, Expenditure, Financial sector policy and analysis, Financial services, Fiscal policy, Fiscal stimulus, Foreign exchange, Money, Spillovers

Keywords: Bank credit, Bank lending, Banking flow, Baseline estimation result, Cross-border bank lending, Cross-border banking, Cross-border banking flow, Cross-border banking flows, Cross-border lending, Emerging market, Exchange rate, Exchange rate arrangements, Expansionary fiscal policy shock, Federal funds rate, Fiscal policy shock, Fiscal stimulus, Fiscal-financial spillovers, Global, Government spending, Government spending shock, Local projections, Monetary policy, Monetary policy prompt bank, NBER recession, Nominal GDP, Nonlinear effects, Prompt bank, Recipient country, Spillovers, Trilemma, U.S. dollar, Variance error decomposition, WP

Publication Details

Pages:

60
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/150
Stock No:

WPIEA2019150
ISBN:

9781484389690
ISSN:

1018-5941

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