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Cross-Border flows and the effect of Global Financial shocks in Latin America

Author

Listed:
  • Gondo, Rocío

    (Banco Central de Reserva del Perú)

  • Pérez, Fernando

    (Banco Central de Reserva del Perú)

Abstract

This work quantifies the effect of changes in global financial conditions on cross-border flows and domestic financial and macroeconomic variables for a group of countries in Latin America. Using the BIS database of international banking statistics, we consider heterogeneous effects of different types of international financing (credit from global banks to domestic banks and non-financial firms and bond issuance by non-financial firms), on the behavior of the domestic banking system and the transmission to the real economy through the link between bank credit, investment and output. Consistent with the implications from a DSGE model such as Aoki et al. (2018), our results show that an increase in foreign interest rates translate into lower external funding for banks and thus into lower credit growth and higher domestic interest rates. This effect is amplified through an exchange rate depreciation due to capital outflows. We find evidence of a larger drop in flows from global banks to domestic banks relative to those from global banks to non-financial firms. In terms of the real economy, we observe a reduction in GDP growth, although not significant, and an increase in inflation due to the pass through effect from the exchange rate to prices.

Suggested Citation

  • Gondo, Rocío & Pérez, Fernando, 2019. "Cross-Border flows and the effect of Global Financial shocks in Latin America," Working Papers 2019-020, Banco Central de Reserva del Perú.
  • Handle: RePEc:rbp:wpaper:2019-020
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    References listed on IDEAS

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    More about this item

    Keywords

    Panel Vector Autoregressions; Exogenous Block; Bayesian Estimation; Cross-Border flows.;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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