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International Spillovers and Local Credit Cycles

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  • Baskaya, Yusuf Soner
  • di Giovanni, Julian
  • Kalemli-Ozcan, Sebnem
  • Ulu, Mehmet Fatih

Abstract

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.

Suggested Citation

  • Baskaya, Yusuf Soner & di Giovanni, Julian & Kalemli-Ozcan, Sebnem & Ulu, Mehmet Fatih, 2017. "International Spillovers and Local Credit Cycles," CEPR Discussion Papers 11839, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:11839
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    More about this item

    Keywords

    Bank credit; Capital Flows; Firm Heterogeneity; Risk premium; VIX;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • F0 - International Economics - - General
    • F1 - International Economics - - Trade

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