DP11839 International Spillovers and Local Credit Cycles

Author(s): Yusuf Soner Baskaya, Julian di Giovanni, Sebnem Kalemli-Ozcan, Mehmet Fatih Ulu
Publication Date: February 2017
Date Revised: September 2018
Keyword(s): Bank credit, Capital Flows, Firm Heterogeneity, Risk premium, VIX
JEL(s): E0, F0, F1
Programme Areas: International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11839

This paper studies the impact of the Global Financial Cycle (GFC) on domestic credit market conditions in a large emerging market, Turkey, over 2003-13. We use administrative data covering the universe of corporate loan transactions matched to firm and bank balance sheets to provide evidence on four facts that are critical in the transmission of the GFC to emerging markets: (1) uncovered interest parity (UIP) is violated at the firm-bank level - firms pay a lower interest rate when borrowing in foreign currency from their domestic banks; (2) the UIP risk premium, both at the firm-bank level and at the country level, strongly co-moves with the GFC over time; (3) during the boom phase of the GFC, the UIP risk premium falls and capital flows into Turkey, lowering domestic borrowing costs and leads to an expansion of credit for domestic firms; and (4) firm-bank level data on pledged collateral on new loan issuances show that borrowing constraints do not relax during the boom phase of the GFC due to higher collateral values. Rather, firms are able to borrow more due to lower borrowing costs on average, which increases their ability to pay back their loans. We show that the GFC can explain 43% of observed corporate credit growth during our sample period. That borrowing constraints do not relax during the boom phase of the GFC due to higher collateral values. Rather, rms are able to borrow more due to lower borrowing costs on average, which increases their ability to pay back their loans. We show that the GFC can explain 43% of observed corporate credit growth during our sample period.