The International Bank Lending Channel of Monetary Policy Rates and QE: Credit Supply, Reach-for-Yield, and Real Effects

Abstract

La serie de Documentos de Investigación del Banco de México divulga resultados preliminares de trabajos de investigación económica realizados en el Banco de México con la finalidad de propiciar el intercambio y debate de ideas. El contenido de los Documentos de Investigación, así como las conclusiones que de ellos se derivan, son responsabilidad exclusiva de los autores y no reflejan necesariamente las del Banco de México.The Working Papers series of Banco de México disseminates preliminary results of economic research conducted at Banco de México in order to promote the exchange and debate of ideas. The views and conclusions presented in the Working Papers are exclusively the responsibility of the authors and do not necessarily reflect those of Banco de México.Abstract: We identify the international credit channel of monetary policy by analyzing the universe of corporate loans in Mexico matched with firm and bank data, and by exploiting foreign monetary policy shocks in a country with a large presence of European and U.S. banks. The robust results show that a softening of foreign monetary policy increases the supply of credit of foreign banks to Mexican firms. Each regional policy shock mainly affects supply via their respective banks, in turn implying strong real effects, with lower elasticities from QE. The impact of low foreign monetary policy rates and expansive QE is stronger on local borrowers with higher ex-ante loan rates -reach-for-yield-and with higher ex-post loan defaults, thus suggesting an international risk-taking channel of monetary policy. All in all, the results suggest spillovers of core-countries´ monetary policies on emerging markets, both in the foreign monetary softening and tightening part.Resumen: Identificamos el canal de crédito internacional de la política monetaria mediante el análisis del universo de préstamos corporativos en México en conjunto con datos de firmas y bancos, y explotando choques de política monetaria internacional en un país en el que la presencia de bancos europeos y estadounidenses es importante. Los resultados del análisis muestran que un relajamiento de la política monetaria en el exterior aumenta la oferta de crédito por parte de bancos extranjeros a las empresas mexicanas, principalmente a través de sus respectivos bancos, implicando, a su vez, efectos reales significativos. El impacto de bajas tasas de política monetaria internacional y expansiones en el QE es mayor para las empresas que enfrentan tasas de interés ex-ante más altas y mayores tasas de impago ex-post, sugiriendo la existencia de un canal de toma de riesgos internacional de la política monetaria. Palabras Clave: Política monetaria, globalización financiera, flexibilización cuantitativa, oferta de crédito, toma de riesgos, bancos extranjeros. Documento de Investigación

How Does the Strength of Monetary Policy Transmission Depend on Real Economic Activity?

“…Banks' lending incentives may be different during this period due to the large quantities of reserves they hold. Still, it is an interesting finding in the domestic context, seeing as Morais et al (2017) and Temesvary et al (2018) found some evidence of the bank credit channel in U.S. banks' lending in foreign countries.…”

Commodity Prices and Bank Lending

“…Our paper speaks to the literature on the economic effects of commodity price changes in developing countries and makes a contribution on several fronts. We expand the literature on the international transmission of macroeconomic shocks through the bank lending channel (Baskaya et al 2017;Cetorelli and Goldberg 2011;Ivashina, Scharfstein, and Stein 2015;Morais et al 2019;Ongena, Peydró, and Van Horen 2015;Peek and Rosengren 1997;Schnabl 2012) by focusing on commodity prices. We bring to this literature a unique administrative data on the universe of loan applications for a developing country.…”

“…important role in the transmission of shocks, both domestic and external, to economic activity. While there is no dearth of studies on the international transmission of shocks through the banking sector in the context of advanced and emerging market economies (Cetorelli and Goldberg 2011;De Haas and Van Horen 2013;Ivashina, Scharfstein, and Stein 2015;Morais et al 2019;Ongena, Peydró, and Van Horen 2015;Schnabl 2012), there is little evidence on the role of banks in the transmission of global shocks to developing countries, possibly because of low levels of global financial integration of banks in these countries. However, the transmission of international shocks through bank lending could have important effects on the real economy in developing countries, where equity and bond markets are underdeveloped and banks are an important source of finance for domestic firms.…”

Effects of unconventional monetary policy across U.S. industries

“…The results indicate that the positive association between the unconventional monetary policy and the industry-level total output and total wages and salaries becomes somewhat stronger. 5 Following Morais et al (2019), I also use the annual growth rate in total assets of the Federal Reserve over GDP as an alternative measure of unconventional monetary policy. The results presented in Table 14 confirm that the positive growth rate in large-scale asset purchases corresponds with subsequent increases in industry-level total output and total wages and salaries.…”