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Federal Reserve Bank of Boston
Working Papers
U. S. monetary policy and emerging market credit cycles
Falk Bräuning
Victoria Ivashina
Abstract

Foreign banks’ lending to firms in emerging market economies (EMEs) is large and denominated primarily in U.S. dollars. This creates a direct connection between U.S. monetary policy and EME credit cycles. We estimate that over a typical U.S. monetary easing cycle, EME borrowers face a 32-percentage-point greater increase in the volume of loans issued by foreign banks than borrowers from developed markets face, with a similarly large effect upon reversal of the U.S. monetary policy stance. This result is robust across different geographical regions and industries, and holds for non-U.S. lenders, including those with little direct exposure to the U.S. economy. Local EME lenders do not offset the foreign bank capital flows; thus, U.S. monetary policy affects credit conditions for EME firms. We show that the spillover is stronger in higher-yielding and more financially open markets, and for firms with a higher reliance on foreign bank credit.


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Falk Bräuning & Victoria Ivashina, U. S. monetary policy and emerging market credit cycles, Federal Reserve Bank of Boston, Working Papers 17-9, 29 Aug 2017.
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Keywords: global business cycle; monetary policy; emerging markets; reaching for yield
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