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

Author

Listed:
  • Sangyup Choi

    (Yonsei University)

  • Davide Furceri

    (International Monetary Fund
    University of Palermo)

  • Chansik Yoon

    (Princeton University)

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 25 bp (50 bp) 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.

Suggested Citation

  • Sangyup Choi & Davide Furceri & Chansik Yoon, 2021. "International Fiscal-Financial Spillovers:the Effect of Fiscal Shocks on Cross-Border Bank Lending," Open Economies Review, Springer, vol. 32(2), pages 259-290, April.
  • Handle: RePEc:kap:openec:v:32:y:2021:i:2:d:10.1007_s11079-020-09606-2
    DOI: 10.1007/s11079-020-09606-2
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    1. Choi, Sangyup & Furceri, Davide, 2019. "Uncertainty and cross-border banking flows," Journal of International Money and Finance, Elsevier, vol. 93(C), pages 260-274.

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    More about this item

    Keywords

    Fiscal-financial spillovers; Cross-border banking flows; Local projections; Nonlinear effects; Trilemma;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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