International Fiscal-Financial Spillovers:the Effect of Fiscal Shocks on Cross-Border Bank Lending

Abstract

This paper sheds new light on the degree of international fiscal-financial spillovers by investigating the effect of domestic fiscal policies on cross-border bank lending. By estimating the dynamic response of U.S. cross-border bank lending towards 45 recipient countries to exogenous domestic fiscal shocks (both measured by spending and revenue) between 1990Q1 and 2012Q4, we find that expansionary domestic fiscal shocks lead to a statistically significant increase in cross-border bank lending and the size of the effect is comparable to an exogenous decline in the federal funds rate by about 25bp (50bp) for spending (revenue) shocks. The fiscal-financial spillovers we find are independent of changes in monetary policy or financial conditions measured by the VIX. The effects also depend on the sign of the fiscal shocks and the underlying economic conditions of a source country. While capital controls seem to play some moderating role, we do not find systematic and statistically significant differences in the spillover effects across recipient countries, depending on their exchange rate regime. The extension of the analysis to fiscal shocks for a panel of 16 small open economies largely confirms the U.S. economy's findings.

Transmission of the Global Bank Liquidity Shock: Evidence from the US Foreign Bank Loans to Southeast Asian Economies

“…It illustrates the shock-transmission impact of American loans by foreign banks to Southeast Asian economies. Similarly, this outcome bears relevance to the research of Albrizio et al (2020), Avdjiev et al (2020), andChoi et al (2021), who explained that When major financial institutions discovered financial turmoil, investors began to invest in undeveloped countries.…”

“…The study by Abbassi et al (2022), Choi and Furceri (2019), Haddou (2022), and Shareef and Prabheesh (2020) provide a lender-side analysis, revealing that decrease in the home countries' economy reduces overseas bank loans. With the same perspective of lender's point of view, Albrizio et al (2020), Avdjiev et al (2020), andChoi et al (2021) show a similar decrease in home lending due to a more tightening monetary policy in host countries as a borrower. Based on the opposite perspective, Barrell and Nahhas (2020) and Haddou (2022) provide a shred of evidence that borrower countries' conditions, such as business cycle and rate of return, improve cross-border lending attraction.…”

“…Interconnection between the US and Southeast Asian countries in this financial aspect has included the countries facing the risk of a typical lender channel. A sudden loss in a lender country may force their banks to withdraw their portfolio from borrower countries due to the rebalancing risk and satisfying regulatory constraints (Albrizio et al, 2020;Choi et al, 2021;Park & Shin, 2021). Atyabi et al (2020) and Murai and Schnabl (2021) explained that this kind of capital outflow might transmit turmoil over the globe, especially the borrowers.…”

“…The prior studies, which have used a variety of tools, look at how the global financial meltdown spread from industrialized to developing countries through the foreign bank lending channel. They offered many genres of writing that segmented the characteristics within the native country's (push) and host country's (pull) factors (Abbassi et al, 2022;Albrizio et al, 2020;Avdjiev et al, 2020;Barrell & Nahhas, 2020;Choi et al, 2021;Choi & Furceri, 2019;Haddou, 2022;Shareef & Prabheesh, 2020). The study by Abbassi et al (2022), Choi and Furceri (2019), Haddou (2022), and Shareef and Prabheesh (2020) provide a lender-side analysis, revealing that decrease in the home countries' economy reduces overseas bank loans.…”

Can US Fiscal Stimulus Negatively Affect US Balance of Trade?

“…A paper by Choi (2021) sheds new light on the degree of international fiscal-financial spillovers by investigating the effect of domestic fiscal policies on cross-border bank lending. By estimating the dynamic response of U.S. cross-border bank lending towards 45 recipient countries to exogenous domestic fiscal shocks (both measured by spending and revenue) between 1990Q1 and 2012Q4, he finds that expansionary domestic fiscal shocks lead to a statistically significant increase in cross-border bank lending and the size of the effect is comparable to an exogenous decline in the federal funds rate by about 25 bp (50 bp) for spending (revenue) shocks independent of changes in monetary policy or financial conditions measured by the VIX.…”