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Federal Reserve Bank of San Francisco
Working Paper Series
U.S. Monetary Policy and Fluctuations of International Bank Lending
Stefan Avdjiev
Galina Hale
Abstract

There is no consensus in the empirical literature on the direction in which U.S. monetary policy affects cross-border bank lending. We find robust evidence that the impact of the U.S. federal funds rate on cross-border bank lending in a given period depends on the prevailing international capital flows regime and on the level of the two main components of the federal funds rate: macro fundamentals and monetary policy stance. During episodes in which bank lending from advanced to emerging economies is booming, the relationship between the federal funds rate and cross-border bank lending is positive and mostly driven by the macro fundamentals component, which is consistent with a search-for-yield behavior by internationally-active banks. In contrast, during episodes of stagnant growth in bank lending from advanced to emerging economies, the relationship between the federal funds rate and bank lending is negative, mainly due to the monetary policy stance component of the federal funds rate. The latter set of results is driven by the lending to emerging markets, which is consistent with the international bank-lending channel and flight-to- quality behavior by internationally-active banks.


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Stefan Avdjiev & Galina Hale, U.S. Monetary Policy and Fluctuations of International Bank Lending, Federal Reserve Bank of San Francisco, Working Paper Series 2018-2, 11 Jan 2018.
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DOI: 10.24148/wp2018-02
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