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

Author

Listed:
  • Jin Cao

    (Norges Bank (Central Bank of Norway))

  • Valeriya Dinger

    (Universität Osnabrück)

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 allows for a convincing identification of the relation between lending and global factors.

Suggested Citation

  • Jin Cao & Valeriya Dinger, 2018. "Financial Globalization and Bank Lending: The Limits of Domestic Monetary Policy?," Working Paper 2018/4, Norges Bank.
    • Handle: RePEc:bno:worpap:2018_04
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    Cited by:

    1. Jin Cao & Valeriya Dinger & Anna Grodecka‐Messi & Ragnar Juelsrud & Xin Zhang, 2021. "The interaction between macroprudential and monetary policies: The cases of Norway and Sweden," Review of International Economics, Wiley Blackwell, vol. 29(1), pages 87-116, February.
    2. Bagsic, Cristeta & Bayangos, Veronica & Moreno, Ramon & Parcon-Santos, Hazel, 2025. "The impact of currency depreciation and foreign exchange positions on bank lending: Evidence from an emerging market," Emerging Markets Review, Elsevier, vol. 66(C).
    3. Beutler, Toni & Gubler, Matthias & Hauri, Simona & Kaufmann, Sylvia, 2021. "Bank lending in Switzerland: Driven by business models and exposed to uncertainty," International Review of Financial Analysis, Elsevier, vol. 78(C).
    4. Toni Beutler & Matthias Gubler & Simona Hauri & Sylvia Kaufmann, 2020. "Bank lending in Switzerland: Capturing cross-sectional heterogeneity and asymmetry over time," Working Papers 20.04, Swiss National Bank, Study Center Gerzensee.
    5. Cao, Jin & Dinger, Valeriya & Gómez, Tomás & Gric, Zuzana & Hodula, Martin & Jara, Alejandro & Juelsrud, Ragnar & Liaudinskas, Karolis & Malovaná, Simona & Terajima, Yaz, 2023. "Monetary policy spillover to small open economies: Is the transmission different under low interest rates?," Journal of Financial Stability, Elsevier, vol. 65(C).
    6. Lodge, David & Pérez, Javier J. & Albrizio, Silvia & Everett, Mary & De Bandt, Olivier & Georgiadis, Georgios & Ca' Zorzi, Michele & Lastauskas, Povilas & Carluccio, Juan & Parraga Rodriguez, Susana &, 2021. "The implications of globalisation for the ECB monetary policy strategy," Occasional Paper Series 263, European Central Bank.
    7. Matthieu Bussière & Jin Cao & Jakob de Haan & Robert Hills & Simon Lloyd & Baptiste Meunier & Justine Pedrono & Dennis Reinhardt & Sonalika Sinha & Rhiannon Sowerbutts & Konstantin Styrin, 2021. "The interaction between macroprudential policy and monetary policy: Overview," Review of International Economics, Wiley Blackwell, vol. 29(1), pages 1-19, February.
    8. Ivanova, Nadezhda & Styrin, Konstantin, 2025. "The effect of US monetary policy on Russian Banks in a low interest rate environment," Emerging Markets Review, Elsevier, vol. 65(C).
    9. Nicolas Houli'e, 2025. "The impact of economic policies on housing prices. Approximations and predictions in the UK, the US, France, and Switzerland from the 1980s to today," Papers 2505.09620, arXiv.org.
    10. Aiba, Daiju, 2023. "Bank dependency on foreign funding and global liquidity shocks: The importance of US monetary policy for a developing country," Journal of Asian Economics, Elsevier, vol. 84(C).
    11. Baptiste Meunier & Justine Pedrono, 2021. "A Prudential trade-off? Leakages and Interactions with Monetary Policy," Working papers 805, Banque de France.

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    Keywords

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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