Cross-border spillovers of monetary policy have traditionally been at the centre of international policy debates, and particularly since the onset of the Global Crisis. Some observers asserted that monetary policy decisions taken in advanced economies reduced monetary autonomy in emerging markets and potentially destabilised economic activity abroad. Perhaps most prominently, Rajan (2016) argued in favour of greater international co-ordination of monetary policies. To the contrary, Yellen (2016) cited research suggesting that, all told, US monetary policy spillovers to other economies are positive, and Cœuré (2017) argued that unconventional monetary policies are not necessarily a zero-sum game.
The channels through which one country’s monetary policy affects the international economy are still not that well understood – including spillovers via internationally active banks. For domestic transmission, understanding heterogeneity in individual banks’ responses to monetary policy shocks has shown to be key (Kashyap and Stein 1994, 2000). Because banks’ decisions play a central role in the global economy and the effectiveness of monetary policy, understanding the sources and drivers of heterogeneity is at least equally relevant. Unfortunately, cross-country evidence on heterogeneity is difficult to obtain: individual bank data are typically confidential; most existing studies focus on countries with a high degree of financial development; and policy effects explored tend to be domestic ones.
The International Banking Research Network’s common analytical approach
The latest project of the International Banking Research Network (IBRN) brings a new perspective on the question how heterogeneity affects international monetary transmission:1 it presents studies involving a diverse group of 17 countries, each using confidential individual bank data available to central banks, plus two cross-country analyses of more aggregated data.2 Country teams work in parallel with a common analytical framework. The results inform the heterogeneity in transmission across banks and across periods of conventional and unconventional policy, revealing frictions in international transmission that may be obscured by aggregate data.
Our focus is on monetary policy spillovers from the euro area, Japan, UK and US. Some country teams study inward transmission – they analyse how monetary policy in key foreign countries affects lending by domestic resident banks or hosted foreign branches. Other country teams take an outward perspective —they look at how domestic banks adjust their foreign lending to changes in domestic monetary policy, including via their affiliates located in other countries.
In a recent paper, we are set out in detail the common empirical strategy and a meta-analysis of the results (Buch et al. 2018). Broadly, the methodology explains changes in domestic lending to the real economy in terms of foreign monetary policy, a range of bank balance sheet characteristics, and a set of control variables. Each of the 17 country teams selected the type of transmission viewed as the most relevant and for which requisite data are available: 13 countries, including both advanced and emerging economies, explored the inward transmission of foreign monetary policy, whereas five countries examined the outward transmission of their own monetary policy.
We consider the channels of monetary transmission stressed in the literature – the bank lending and portfolio channels but the results mainly emphasise the importance of bank-level characteristics and the ‘frictions’ that banks face. The frictions include the ease with which capital and liquidity can be adjusted; access to different types of funding such as through the wholesale market; foreign currency funding; availability of collateral; or access to an international network of banking affiliates. These frictions affect how individual banks are able to adjust to changes in monetary policy, and they can differ substantially in scale and nature across countries. As such, our cross-country study provides insights into idiosyncratic frictions that might be missed in a literature that otherwise draws heavily on the experiences of only the most financially developed economies.
Four themes emerge from our meta-analysis of the work of the country teams.
1. Monetary policy has pervasive cross-border spillover effects via banks’ lending to the domestic real economy.
Every country team studying inward transmission of foreign monetary policy to domestic lending found statistically significant evidence of an effect – although some found a positive effect and some a negative. Most teams identified significant effects of US monetary policy, and some teams also found effects from euro area, UK and, Japanese policy. There was also evidence of statistically significant outward transmission of domestic monetary policy from ‘source’ economies, both via cross-border lending by their domestic banks and though the behaviour of their affiliates abroad.
2. Transmission is a feature of conventional and unconventional monetary policy periods.
Measuring monetary policy shocks in periods of unconventional policies is a challenge. During periods of unconventional policy, specifications using the shadow policy rate tend to do a better job in picking up transmission than a proxy using the actual policy rate and the size of central banks’ balance sheets. That is presumably because the former also captures forward guidance and other forms of central bank communications, as well as operations intended to change the composition but not the size of central banks’ asset holdings.
3. Bank-specific heterogeneity matters for cross-border transmission – but the pattern is not straight-forward, and it differs across countries and monetary policy periods.
The incidence of the spillovers does not fit neatly into a singular shared story about one type of transmission channel or form of friction. Our results are supportive of the channels traditionally studied in the literature—notably the bank lending and the portfolio channels. But these channels, at the same time, do not fully capture the richness of transmission channels found across countries.
More specifically, bank heterogeneity clearly matters for international transmission into lending. The characteristics that made the most difference were banks’ cross-border positions and funding structures: banks that receive a larger share of their funding from a country, or in a foreign currency, tend to be more affected by an associated change in monetary policy stance. However, no single balance sheet feature clearly dominates across the exercises. Some have significant effects in different directions in different countries. And some characteristics exhibit clear differences across conventional and unconventional policy periods, for example the roles of intra-bank funding networks become insignificant in the unconventional policy period.
4. The contribution of bank heterogeneity toward explaining spillovers and domestic real economy lending growth varies substantially across countries and specifications.
The contribution of the balance sheet characteristics to the overall explanatory power of our regression specifications is low for many of the countries participating in the initiative. The contribution to cross-bank and over time variation in lending is materially larger for the emerging market economies, and there are notable differences across advanced economies. The findings of relatively low explanatory power, coupled with the large degree of heterogeneity across countries and banks might, at first sight, suggest that monetary policy transmission has not had large effects on real lending growth. However, international spillovers into lending can be large for some banks, even while the average international spillovers of policies into nonbank lending generally are not large.
Ultimately, disaggregation is critical to shedding light into the black box of monetary policy transmission across borders. The traditional channels of monetary policy transmission, commonly discussed in the literature, were mostly formulated in an advanced country setting, using aggregate data, and focused on average effects. The IBRN studies using individual bank-level data for a more diverse group of countries find evidence of significant spillovers, and show how heterogeneity across banks drives different rates of transmission into domestic private lending across banks. In fact, the types of frictions and market structures that determine spillovers are not common across countries and deserve closer attention, as revealed by the in-depth (bank level) cross-country initiative.
Authors’ note: The views expressed in this column are solely those of the authors and should not be interpreted as reflecting those of the Federal Reserve Bank of New York, the Federal Reserve System, the Deutsche Bundesbank, the Banque de France, the Eurosystem, or the Bank of England.
Argimon, I, C Bonner, R Correa, P Duijm, J Frost, J de Haan, L de Haan, and V Stebunovs (2017), “Financial Institutions’ Business Models and the Global Transmission of Monetary Policy”, Federal Reserve Board, De Nederlandsche Bank and Banco de España.
Auer, S, C Friedrich, M Ganarin, T Peligrova and P Towbin (2017), “International Monetary Policy Transmission through Banks in Small Open Economies”, Bank of Canada and Swiss National Bank.
Avdjiev, S, C Koch, P McGuire, and G von Peter (2017), “Transmission of Monetary Policy through Global Banks: Whose Policy Matters?”, Bank for International Settlements.
Barbosa, L, D Bonfim, S Costa and M Everett (2017), “Cross-border Spillovers of Monetary Policy: what changes during a Banking Crisis?”, Central Bank of Ireland and Banco de Portugal.
Buch, C, M Bussiere, and L Goldberg (2016), “Prudential policies crossing borders: Evidence from the International Banking Research Network,” VoxEU.org, 9 December.
Buch, C, M Bussiere, L Goldberg, and R Hills (2018), "The International Transmission of Monetary Policy," NBER Working Papers 24454.
Buch, C, J Chapman, and L Goldberg (2014), “Cross-Country Evidence on Transmission of Liquidity Risk through Global Banks,” Federal Reserve Bank of New York Liberty Street Economics (blog), 1 October.
Coeuré, B (2017), “The international dimension of the ECB’s asset purchase programme” at the Foreign Exchange Contact Group meeting, 11 July .
Gajewski, K, A Jara, J Kang, J Mok, D Moreno, and D Serwa (2017), “International Bank Lending Channel of Monetary Policy: Lessons from Chile, Korea, and Poland”, Banco Central de Chile, Bank of Korea and Narodowy Bank Polski.
Gräb, J and D Zochowski (2017), “The International Bank Lending Channel of Unconventional Monetary Policy” ECB Working Paper 2109.
Hills, R, K Ho, D Reinhardt, R Sowerbutts, E Wong and G Wu (2017), “The International Transmission of Monetary Policy through Financial Centres: Evidence from the United Kingdom and Hong Kong”, Hong Kong Monetary Authority Working Paper 26.
Kashyap, A K and J C Stein (1994), “Monetary Policy and Bank Lending”, in N G Mankiw (ed.), Monetary Policy, Chicago: University of Chicago Press: 221–256.
Kashyap, A K and J C Stein (2000), “What Do A Million Observations on Banks Say About the Transmission of Monetary Policy?”, American Economic Review 90 (June): 407-428.
Kruglova, A and K Styrin (2017), “Inward Transmission of Foreign Monetary Policy Shocks to a Small Open Economy in the Presence of Country-Specific Shocks: The Case of Russia”, Bank of Russia.
Loeffler, A, E Segalla, G Valitova and U Vogel (2017), “International Monetary Policy Spillovers through the Bank Funding Channel”, Deutsche Bundesbank and Oesterreichische Nationalbank.
Rajan, R (2016), “Towards Rules of the Monetary Game”, Talk at IMF Asia Conference, 12 March.
Schmidt, J, M Caccavaio, L Carpinelli and G Marinelli (2017), “International Spillovers of Monetary Policy: Evidence from France and Italy”, Banque de France and Banca d’Italia.
Yellen, J (2016), “Macroeconomic Research After the Crisis” at "The Elusive 'Great' Recovery: Causes and Implications for Future Business Cycle Dynamics" 60th Annual eEconomic Conference sponsored by the Federal Reserve Bank of Boston, 14 October.
 This is the IBRN’s third project; the policy lessons of the first two are described in Buch et al. (2014) and Buch et al. (2016).
 Papers contributed to the IBRN initiative include Argimon et al. (2017); Auer et al. (2017); Avdjiev et al. Peter (2017); Barbosa et al. (2017); Gajewski et al. (2017); Gräb and Zochowski (2017), Hills et al. Wu (2017); Kruglova and Styrin (2017), Loeffler et al. (2017); and Schmidt et al. (2017).