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No Pain, No Gain. Multinational Banks in the Business Cycle

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We study the role of multinational banks in the propagation of business cycles in host countries. In our economy, multinational banks can transfer liquidity across borders through internal capital markets. However, their scarce knowledge of local firms' collateral hinders their allocation of liquidity to firms. We find that, through the interaction between the "liquidity origination" advantage and the "liquidity allocation" disadvantage, multinational banks can act as a short-run stabilizer in the immediate aftermath of domestic liquidity shocks but be a drag on the subsequent recovery. Structural and cyclical policies can ameliorate the trade-off induced by the presence of multinational banks effective stabilization tool.

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  • Cao, Qingqing & Minetti, Raoul & Olivero, Maria, 2018. "No Pain, No Gain. Multinational Banks in the Business Cycle," School of Economics Working Paper Series 2018-6, LeBow College of Business, Drexel University.
  • Handle: RePEc:ris:drxlwp:2018_006
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    Keywords

    Multinational Banks; Macroeconomic Stability; Business Cycle;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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