Financial Globalization and Bank Lending: The Limits of Domestic Monetary Policy?

38 Pages Posted: 19 Apr 2018

See all articles by Jin Cao

Jin Cao

Norges Bank - Research Department; Ludwig Maximilian University of Munich (LMU); CESifo (Center for Economic Studies and Ifo Institute)

Valeriya Dinger

Universität Osnabrück

Multiple version iconThere are 2 versions of this paper

Date Written: February 28, 2018

Abstract

We empirically analyze how bank lending reacts to monetary policy in the presence of global financial flows. Employing a unique and novel dataset of the funding modes and currency composition of the full population of Norwegian banks in structurally identified regressions, we show that the efficiency of the bank lending channel is affected when banks can shift to international funding and thus insulate their costs of funding from domestic monetary policy. We isolate the effect of global factors from domestic monetary policy by focusing on the deviation of exchange rates from the prediction of (uncovered and covered) interest rate parity. The Norwegian banking sector represents an ideal laboratory since the exogenous exchange rate dynamics.

Keywords: monetary policy, foreign funding channel, bank lending channel, exchange rate dynamics

JEL Classification: E520, F360, G210

Suggested Citation

Cao, Jin and Dinger, Valeriya, Financial Globalization and Bank Lending: The Limits of Domestic Monetary Policy? (February 28, 2018). CESifo Working Paper Series No. 6900, Available at SSRN: https://ssrn.com/abstract=3164779 or http://dx.doi.org/10.2139/ssrn.3164779

Jin Cao (Contact Author)

Norges Bank - Research Department ( email )

P.O. Box 1179
Oslo, N-0107
Norway

Ludwig Maximilian University of Munich (LMU) ( email )

Bankplassen 2, PB 1179 Sentrum
Oslo, NO-0107
Norway

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Valeriya Dinger

Universität Osnabrück ( email )

Neuer Graben
Osnabrück, 49074
Germany

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