How Does Fiscal Policy affect the Transmission of Monetary Policy into Cross-border Bank Lending? Cross-country Evidence

Pradhan, Swapan-Kumar; Takáts, Előd; Temesvary, Judit

doi:10.17016/IFDP.2024.1400

Working Paper

How Does Fiscal Policy affect the Transmission of Monetary Policy into Cross-border Bank Lending? Cross-country Evidence

Abstract: We use a rarely accessed BIS database on bilateral cross-border bank claims by bank nationality to examine the interaction of monetary and fiscal policies. We find significant interactions: the transmission of the monetary policies of major currency issuers is significantly influenced by the fiscal stance of source (home) lending banking systems. Fiscal consolidation in a source country amplifies the effect of currency issuers' monetary policy on lending. For instance, a reduction in the German debt-to-GDP ratio amplifies the negative impact of US monetary policy tightening on USD-denominated cross-border bank lending outflows from German banks. The interaction effects are the strongest for US monetary policy.

Keywords: Monetary policy; Government debt; Cross-border claims; Difference-in-differences;

JEL Classification: E63; F34; F42; G21; G38;

https://doi.org/10.17016/IFDP.2024.1400