Cross-border spillovers of monetary policy: What changes during a financial crisis?

Abstract

This paper analyses cross-border spillovers of monetary policy by examining two countries that were in the eye of the storm during the euro area sovereign debt crisis, namely Ireland and Portugal. The research provides insight as to how banking and sovereign stress affect the inward transmission of foreign monetary policy to two economies that share many characteristics, but that also have many distinct features. In particular, our research addresses the question of whether a banking system in distress reacts more or less to monetary policy changes in other major economies. The empirical analysis indicates that international spillovers are present for US and UK monetary policy for both Ireland and Portugal, but there is heterogeneity in the transmission mechanisms by which they affect credit growth in the two economies. JEL: F60, G15, G21

The interaction between macroprudential and monetary policies: The cases of Norway and Sweden

“…(2019) establish evidence for the bank funding and bank portfolio channel in the transmission of foreign monetary policies in Hong Kong and the United Kingdom, as do Barbosa et al. (2018) for Ireland and Portugal. Auer et al (2019) discuss the role of the international portfolio channel for Switzerland.…”

“…The second channel brought forward is the portfolio channel that has different predictions regarding domestic lending. A tightening of foreign monetary policy may reduce the creditworthiness of foreign borrowers and reduce their collateral values, which may induce banks to reshuffle their portfolios away from foreign assets and toward domestic assets (see Barbosa et al, 2018; Hills et al, 2019), hence increase domestic lending. This channel has been also called the international substitution effect in Avdjiev et al (2018).…”

The role of asymmetry in the interplay between internal and external factors: Empirical evidence from the US, Brazil, Canada and Mexico

“…They also indicated that the impacts of conventional monetary policy measures were stronger than those of unconventional ones. Barbosa et al (2018) evaluated the effects of monetary policy spillovers from the Fed and the BoE on two peripheral European countries: Ireland and Portugal. Their primary concern was the bank lending channel of the transmission mechanism, and they detected heterogeneous transmission mechanisms that significantly influenced credit growth in Ireland and Portugal.…”

“…Additionally, the identification of the transmission mechanism of monetary policy with indicators reflecting unconventional monetary policy has gained importance in terms of raising its effectiveness. The shadow interest rate developed by Krippner (2014) has been widely used, and the international spillover effects of a particular monetary policy have frequently been examined based on the financial sector (Barbosa et al, 2018;Gajewski et al, 2019).…”