Bank globalization and the balance sheet channel of monetary transmission
The literature typically finds that the development of financial markets has decreased the ability of central banks to affect the real economy. This paper shows that this negative relationship does not hold for the balance sheet channel of monetary transmission and bank globalization -- one aspect of financial development. The reason is that global banks are more sensitive to borrowers' leverage. By affecting this leverage, monetary policy has a larger impact on global banks' lending and aggregate economic activity. We use bank-level, Call Report data to obtain this disparity between more and less global banks. We then use this data in the estimation of a general equilibrium model and find that the balance sheet channel of monetary policy operates mainly through more global banks.
|Date of creation:||Jul 2010|
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