Discussion Paper Details

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Title: International Spillovers and Local Credit Cycles

Author(s): Yusuf Soner Baskaya, Julian di Giovanni, Sebnem Kalemli-Ozcan and Mehmet Fatih Ulu

Publication Date: February 2017

Keyword(s): Bank credit, Capital Flows, Firm Heterogeneity, Risk premium and VIX

Programme Area(s): International Macroeconomics and Finance and Monetary Economics and Fluctuations

Abstract: Most capital inflows are intermediated by domestic banks. We use transaction-level data on bank credit to estimate the causal impact of capital inflows on lending. The key mechanism is a failure of UIP, where capital inflows due to increases in global risk-appetite lead domestic banks to lower borrowing rates. Our estimates explain 43% of observed credit growth, where bank heterogeneity is critical for the aggregate impact. Foreign banks, exchange-rate driven balance-sheet shocks, and the relaxation of firm-level collateral constraints cannot account for our large estimates. Textbook-models, where UIP holds and capital flows are endogenous to demand cannot explain our findings.

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Bibliographic Reference

Baskaya, Y, di Giovanni, J, Kalemli-Ozcan, S and Ulu, M. 2017. 'International Spillovers and Local Credit Cycles'. London, Centre for Economic Policy Research.