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Institutional Investors, the Dollar, and U.S. Credit Conditions

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Listed:
  • Friederike Niepmann
  • Tim Schmidt-Eisenlohr

Abstract

This paper documents that an appreciation of the U.S. dollar is associated with a reduction in the supply of commercial and industrial loans by U.S. banks. An increase in the broad dollar index by 2.5 points (one standard deviation) reduces U.S. banks' corporate loan originations by 10 percent. This decline is driven by a reduction in the demand for loans on the secondary market where prices fall and liquidity worsens when the dollar appreciates, with stronger effects for riskier loans. Today, the main buyers of U.S. corporate loans---and, hence, suppliers of funding for these loans---are institutional investors, in particular mutual funds, which experience outflows when the dollar appreciates. A shift of traditional financial intermediation to these relatively unregulated entities, which are more sensitive to global developments, has led to the emergence of this new channel through which the dollar affects the U.S. economy, which we term the secondary market channel.

Suggested Citation

  • Friederike Niepmann & Tim Schmidt-Eisenlohr, 2019. "Institutional Investors, the Dollar, and U.S. Credit Conditions," International Finance Discussion Papers 1246, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:1246
    DOI: 10.17016/IFDP.2019.1246
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    File URL: https://www.federalreserve.gov/econres/ifdp/files/ifdp1246.pdf
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    References listed on IDEAS

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    Cited by:

    1. Jarociński, Marek, 2020. "Central bank information effects and transatlantic spillovers," Working Paper Series 2482, European Central Bank.

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    More about this item

    Keywords

    Leveraged loan market; Commercial and industrial loans; U.S. dollar exchange rate; Credit standards; Institutional investors;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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