Monetary Policy and Global Banking / Falk Brauning, Victoria Ivashina.

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Brauning, Falk

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w23316.Publication details: Cambridge, Mass. National Bureau of Economic Research 2017.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: When central banks adjust interest rates, the opportunity cost of lending in local currency changes, but--in absence of frictions--there is no spillover effect to lending in other currencies. However, when equity capital is limited, global banks must benchmark domestic and foreign lending opportunities. We show that, in equilibrium, the marginal return on foreign lending is affected by the interest rate differential, with lower domestic rates leading to an increase in local lending, at the expense of a reduction in foreign lending. We test our prediction in the context of changes in interest rates in six major currency areas.

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April 2017.

When central banks adjust interest rates, the opportunity cost of lending in local currency changes, but--in absence of frictions--there is no spillover effect to lending in other currencies. However, when equity capital is limited, global banks must benchmark domestic and foreign lending opportunities. We show that, in equilibrium, the marginal return on foreign lending is affected by the interest rate differential, with lower domestic rates leading to an increase in local lending, at the expense of a reduction in foreign lending. We test our prediction in the context of changes in interest rates in six major currency areas.