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International Spillovers and Local Credit Cycles

Listed author(s):
  • Yusuf Soner Baskaya
  • Julian di Giovanni
  • Sebnem Kalemli-Özcan
  • Mehmet Fatih Ulu

Most capital inflows are intermediated by domestic banks. We use transaction-level data on bank credit to estimate the causal impact of capital inflows on lending. The key mechanism is a failure of UIP, where capital inflows due to increases in global risk-appetite lead domestic banks to lower borrowing rates. Our estimates explain 43% of observed credit growth, where bank heterogeneity is critical for the aggregate impact. Foreign banks, exchange-rate driven balance-sheet shocks, and the relaxation of firm-level collateral constraints cannot account for our large estimates. Textbook- models, where UIP holds and capital flows are endogenous to demand cannot explain our findings.

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Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 953.

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Date of creation: Feb 2017
Handle: RePEc:bge:wpaper:953
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