Cultural proximity and cross‐border banking flows

Abstract

This paper disentangles the impacts of cultural proximity on cross‐border banking flows, using large country‐pair data from 1996 to 2019. On applying the gravity model with the Poisson Pseudo Maximum Likelihood estimator, our main findings show that cultural proximity is both a push and pull factor, which robustly anticipates increased outflows (cross‐border lending) and inflows (cross‐border borrowing). The impacts of cultural proximity are transmitted throughout the information asymmetry and cost reduction channels. These impacts become pronounced for geographically proximate country pairs and hold for a different measure of cultural goods taxonomy and for controlling the endogeneity problem.