Cross-Border Spillovers in Foreign Currency Credit

This paper examines the presence of cross-country spillovers in foreign currency loans. We use spatial econometric techniques and a unique monthly dataset of loan shares in foreign currency denomination, extending over three decades for 23 emerging countries, to assess how changes in local monetary policy affect domestic banks’ currency lending portfolios and how the latter changes transmit to other countries. We find strong evidence of cross-border spillovers in the proportion of foreign currency credit. Spillovers are channelled by geographic linkages between countries and pass through to all countries in a network with higher potency for more proximate countries. Monetary policy interventions that influence lending in foreign currency in one country can, therefore, affect lending in neighboring countries.