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Reserve Accumulation and Bank Lending: Evidence from Korea

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  • Youngjin Yun

    (Bank of Korea)

Abstract

Reserve accumulation is funded by the central bank’s domestic borrowing as it al- ways sterilizes reserve purchases by increasing domestic liabilities. The central bank borrowing could crowd out firms’ borrowing under imperfect international capital mo- bility. I present a model that illustrates the mechanism and examine monthly balance sheets of Korean banks from September 2003 to August 2008 to find that bank lending to firms did decline after reserve accumulation. Controlling for individual effects and time effects, it is estimated that bank lending declined by 50 cents after one addi- tional dollar of reserve accumulation. A causal relationship is verified by differences- in-differences identification. After one standard deviation reserve accumulation shock, primary dealer banks and foreign bank branches cut lending growth by 0.4 and 1.6 per- centage points more than non-primary dealer banks and domestic banks, respectively.

Suggested Citation

  • Youngjin Yun, 2018. "Reserve Accumulation and Bank Lending: Evidence from Korea," GRU Working Paper Series GRU_2018_007, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    • Handle: RePEc:cth:wpaper:gru_2018_007
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    File URL: https://www.cb.cityu.edu.hk/ef/doc/GRU/WPS/GRU%232018-007%20Yun(1).pdf
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    2. Fatum, Rasmus & Hattori, Takahiro & Yamamoto, Yohei, 2023. "Reserves and risk: Evidence from China," Journal of International Money and Finance, Elsevier, vol. 134(C).
    3. Woo Jin Choi & Ju Hyun Pyun & Youngjin Yun, 2020. "Reserve Accumulation and Firm Investment: Evidence from Matched Bank–Firm Data," GRU Working Paper Series GRU_2020_027, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.

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    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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