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Asynchronous Monetary Policies and International Dollar Credit

Author

Listed:
  • Dong He

    (The International Monetary Fund)

  • Eric Wong

    (Hong Kong Monetary Authority)

  • Andrew Tsang

    (Hong Kong Monetary Authority)

  • Kelvin Ho

    (Hong Kong Monetary Authority)

Abstract

This paper presents a theoretical model in which the supply of international dollar credit by a global bank is responsive to unconventional monetary policies (UMPs) both in the US and its home country, the functioning of the FX swap market and the bank's default risk. The theoretical model is tested using two unique confidential datasets. The results suggest that the contractionary effect of US monetary normalisation on global liquidity would be partly offset by the expansionary effect of UMPs in Japan and the euro-area. However, a stress testing exercise shows that global liquidity would be seriously disrupted if normalisation of monetary policy in the US leads to financial market dislocation, in particular in the FX swap market. Finally, this study finds that global banks' risk-taking attitude, credit risk exposure, and the business model of their overseas offices are important factors affecting how dollar credit supplied by international banks would respond to UMPs.

Suggested Citation

  • Dong He & Eric Wong & Andrew Tsang & Kelvin Ho, 2015. "Asynchronous Monetary Policies and International Dollar Credit," Working Papers 192015, Hong Kong Institute for Monetary Research.
    • Handle: RePEc:hkm:wpaper:192015
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    References listed on IDEAS

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    Cited by:

    1. Vladyslav Sushko & Claudio Borio & Robert Neil McCauley & Patrick McGuire, 2016. "The failure of covered interest parity: FX hedging demand and costly balance sheets," BIS Working Papers 590, Bank for International Settlements.
    2. Ms. Carolina Osorio-Buitron & Mr. Esteban Vesperoni, 2015. "Big Players Out of Synch: Spillovers Implications of US and Euro Area Shocks," IMF Working Papers 2015/215, International Monetary Fund.
    3. Luna Romo González, 2017. "European banks US dollar liabilities: beyond the covered interest parity," Financial Stability Review, Banco de España, issue MAY.
    4. Claudio Borio & Robert Neil McCauley & Patrick McGuire & Vladyslav Sushko, 2016. "Covered interest parity lost: understanding the cross-currency basis," BIS Quarterly Review, Bank for International Settlements, September.
    5. Hongyi Chen & Andrew Tsang, 2016. "The Impact of US Monetary Policy and Other External Shocks on the Hong Kong Economy: A Factor-augmented VAR Approach," Working Papers 092016, Hong Kong Institute for Monetary Research.

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