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Capital controls, domestic macroprudential policy and the bank lending channel of monetary policy

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  • Fabiani, Andrea
  • Piñeros, Martha López
  • Peydró, José-Luis
  • Soto, Paul E.

Abstract

We study how capital controls and domestic macroprudential policy tame credit supply booms, either directly or by enhancing the local bank-lending channel of monetary policy. We exploit credit registry data and the introduction of capital controls on foreign exchange (FX) debt inflows and increase of reserve requirements on domestic bank deposits in Colombia during a boom. We find that capital controls strengthen the bank-lending channel. Increasing the local monetary policy rate widens the interest rate differential with the U.S.; hence, relatively more FX-indebted banks carry-trade cheap FX-funds with expensive peso lending, especially towards riskier firms. Capital controls tax FX-debt and break the carry-trade. Differently, raising reserve requirements on domestic deposits directly reduces credit supply, particularly for riskier firms, rather than enhancing the bank-lending channel. Importantly, banks differentially finance credit with domestic vis-à-vis FX-financing; hence, capital controls and domestic macroprudential policy complementarily mitigate the credit boom and related bank risk-taking.

Suggested Citation

  • Fabiani, Andrea & Piñeros, Martha López & Peydró, José-Luis & Soto, Paul E., 2022. "Capital controls, domestic macroprudential policy and the bank lending channel of monetary policy," Journal of International Economics, Elsevier, vol. 139(C).
  • Handle: RePEc:eee:inecon:v:139:y:2022:i:c:s002219962200109x
    DOI: 10.1016/j.jinteco.2022.103677
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    3. Moch Panji Agung Saputra & Diah Chaerani & Sukono & Mazlynda Md. Yusuf, 2023. "Reserve Fund Optimization Model for Digital Banking Transaction Risk with Extreme Value-at-Risk Constraints," Mathematics, MDPI, vol. 11(16), pages 1-16, August.
    4. Martha López-Piñeros & Norberto Rodríguez-Niño & Miguel Sarmiento, 2022. "Monetary Policy and Portfolio Flows in an Emerging Market Economy," Borradores de Economia 1200, Banco de la Republica de Colombia.
    5. Andrea Fabiani & Martha López & José-Luis Peydró & Paul E. Soto, 2023. "Capital Controls, Corporate Debt and Real Effects: Evidence from Boom and Crisis Times," Borradores de Economia 1244, Banco de la Republica de Colombia.

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    More about this item

    Keywords

    Capital controls; Macroprudential and monetary policy; Carry trade; Credit supply; Risk-taking;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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