Hostname: page-component-cd9895bd7-dk4vv Total loading time: 0 Render date: 2024-12-26T19:17:33.777Z Has data issue: false hasContentIssue false
  • English
  • Français

GLOBAL BANK RISK AND MONETARY POLICY IN AN EMERGING ECONOMY

Published online by Cambridge University Press:  25 January 2021

Paul Luk
Paul Luk*
Affiliation:
Hong Kong Institute for Monetary and Financial Research
*
Address correspondence to: Paul Luk, Hong Kong Institute for Monetary and Financial Research, Units 1005–1011, 10th Floor, One Pacific Place, 88 Queensway, Hong Kong. E-mail: paulskluk@gmail.com. Phone: +852 9785 2821. Fax: +852 2878 7006.
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

The global financial crisis was characterized by heightened financial risk in the USA, which spread to the rest of the world, including emerging economies. This paper constructs a core–periphery model with a global banking network and financial frictions. Due to a common-lender effect, when global banks lend to an emerging economy, heightened financial risk in the center depresses cross-border lending to the emerging economy, reducing real activities, and exacerbating monetary policy trade-offs. As financial markets become more integrated, exchange rate flexibility becomes less welfare enhancing and active capital account policy becomes more welfare enhancing.

Keywords

Global banksFinancial acceleratorUncertaintyCapital Controls
Type
Articles
Information
Macroeconomic Dynamics , Volume 26 , Issue 6 , September 2022 , pp. 1615 - 1646
Copyright
© Cambridge University Press 2021

References

REFERENCES

Allen, F. Beck, T., Carletti, E., Lane, P. R., Schoenmaker, D., and Wagner, W.. (2011). Cross-Border Banking in Europe: Implications for Financial Stability and Macroeconomic Policies, CEPR Report. Centre for Economic Policy Research.Google Scholar
Álvarez, L. J., Dhyne, E., Hoeberichts, M., Kwapil, C., Le Bihan, H., Lünnemann, P., Martins, F., Sabbatini, R., Stahl, H., Vermeulen, P., and Vilmunen, J.. (2006). “Sticky prices in the Euro Area: a Summary of New Micro-evidence,” Journal of the European Economic Association 4(2-3): 575-84.CrossRefGoogle Scholar
Aoki, K., Benigno, G., and Kiytoaki, N.. (2016). “Monetary and Financial Policies in Emerging Markets,” University of Tokyo Working Paper.Google Scholar
Arellano, C., Bai, Y., and Kehoe, P. J.. (2018). “Financial Frictions and Fluctuations in Volatility,” Forthcoming in Journal of Political Economy.CrossRefGoogle Scholar
Backus, D. K., Kehoe, P. J., and Kydland, F. E.. (1992). “International Real Business Cycles,” Journal of Political Economy, 100(4): 745-75.CrossRefGoogle Scholar
Bloom, N. (2009). “The Impact of Uncertainty Shocks,” Econometrica, 77(3): 623–685.Google Scholar
Banerjee, R., Devereux, M. B., and Lombardo, G.. (2016). “Self-oriented Monetary Policy, Global Financial Markets and Excess Volatility of International Capital Flows,” Journal of International Money and Finance, 68: 275-97.CrossRefGoogle Scholar
Bekaert, G., Hoerova, M., and Duca, M. L.. (2013). “Risk, Uncertainty and Monetary Policy,” Journal of Monetary Economics, 60(7): 771–788.CrossRefGoogle Scholar
Bernanke, B., Gertler, M., and Gilchrist, S.. (1999). “The Financial Accelerator in a Quantitative Business Cycle Framework,” In Vol. 1 of Handbook of Macroeconomics, edited by Taylor, J. and Woodford, M., Chapter 21, 1341-1393. Elsevier.Google Scholar
Bruno, V., and Shin, H. S.. (2015). “Capital Flows and the Risk-taking Channel of Monetary Policy,” Journal of Monetary Economics, 71: 119–132.CrossRefGoogle Scholar
Caggiano, G., Castelnuovo, E., and Figueres, J.. (2019) “Economic Policy Uncertainty Spillovers in Booms and Busts,” Oxford Bulletin of Economics and Statistics, 82(1): 125-55.10.1111/obes.12323CrossRefGoogle Scholar
Calvo, G. A. (1983). “Staggered Prices in a Utility-Maximizing Framework,” Journal of Monetary Economics, 12(3): 383–398.CrossRefGoogle Scholar
Cetorelli, N., and Goldberg, L. S.. (2011). “Global Banks and International Shock Transmission: Evidence from the Crisis,” IMF Economic Review, 59(1): 41–76.CrossRefGoogle Scholar
Colombo, V. (2013). “Economic Policy Uncertainty in the US: Does it Matter for the Euro Area?” Economics Letters, 121(1): 39–42.CrossRefGoogle Scholar
Christiano, L. J., Motto, R., and Rostagno, M.. (2014). “Risk Shocks,” American Economic Review, 104(1): 27–65.CrossRefGoogle Scholar
Davis, S., and Presno, I.. (2017). “Capital Controls and Monetary Policy Autonomy in a Small Open Economy,” Journal of Monetary Economics, 85: 114-30.CrossRefGoogle Scholar
Dedola, L., and Lombardo, G.. (2012). “Financial Frictions, Financial Integration and the International Propagation of Shocks,” Economic Policy, 4: 319-59.10.1111/j.1468-0327.2012.00286.xCrossRefGoogle Scholar
De Paoli, B. (2009) “Monetary Policy and Welfare in a Small Open Economy,” Journal of International Economics, 77(1): 11–22.CrossRefGoogle Scholar
Devereux, M. B., and Sutherland, A.. (2011). “Country Portfolios in Oopen Economy Macro-models,” Journal of the European Economic Association, 9(2): 337-69.10.1111/j.1542-4774.2010.01010.xCrossRefGoogle Scholar
Devereux, M. B., and Yetman, J.. (2010). “Leverage Constraints and the International Transmission of Shocks,” Journal of Money, Credit and Banking, 42(s1): 71–105.CrossRefGoogle Scholar
Devereux, M. B., Young, E. R., and Yu, C.. (2019). “Capital Controls and Monetary Policy in Sudden-stop Economies,” Journal of Monetary Economics, 103: 72–74.CrossRefGoogle Scholar
Faia, E. (2007). “Finance and International Business Cycles,” Journal of Monetary Economics, 54: 1018-34.CrossRefGoogle Scholar
Faia, E., and Monacelli, T.. (2008). “Optimal Monetary Policy in a Small Open Economy with Home Bias,” Journal of Money, Credit and Banking, 40(4): 721-50.CrossRefGoogle Scholar
Farhi, E., and Werning, I.. (2014). “Dilemma Not Trilemma? Capital Controls and Exchange Rates with Volatile Capital Flows,” IMF Economic Review, 62: 569–605.CrossRefGoogle Scholar
Fernández-Villaverde, J., Guerrón-Quintana, P., Rubio-Ramírez, J. F., and Uribe, M.. (2011). “Risk Matters: The Real Effects of Volatility Shocks,” American Economic Review, 101(6): 2530-61.CrossRefGoogle Scholar
Forbes, K., and Warnock, F. E.. (2012). “Capital Flow Waves: Surges, Stops, Flight and Retrenchment,” Journal of International Economics, 88(2): 235–251.CrossRefGoogle Scholar
Gali, J., and Monacelli, T.. (2005). “Monetary Policy and Exchange Rate Volatility in a Small Open Economy,” Review of Economic Studies, 72: 707-34.10.1111/j.1467-937X.2005.00349.xCrossRefGoogle Scholar
Gertler, M., and Karadi, P.. (2011). “A Model of Unconventional Monetary Policy,” Journal of Monetary Economics, 58: 17–34.CrossRefGoogle Scholar
Gilchrist, S., Sim, J. W., and Zakrajšek, E.. (2014) “Uncertainty, Financial Frictions, and Investment Dynamics,” National Bureau of Economic Research Working Paper No. 20038.Google Scholar
Hirakata, N., Sudo, N., and Ueda, K.. (2017). “Chained Credit Contracts and Financial Accelerators,” Economic Inquiry, 55(1): 565-79.CrossRefGoogle Scholar
Iacoviello, M., and Minetti, R.. (2006). “International Business Cycles with Domestic and Foreign Lenders,” Journal of Monetary Economics, 53(8): 2267-82.CrossRefGoogle Scholar
International Monetary Fund. (2012). “The Liberalization and Management of Capital Flows: An Institutional View.”CrossRefGoogle Scholar
Kalemli-Ozcan, S., Papaioannou, E.., and Perri, F.. (2013). “Global Banks and Crisis Transmission,” Journal of International Economics, 89(2): 495–510.CrossRefGoogle Scholar
Kimball, M. S., and Shapiro, M. D.. (2008). “Labor Supply: Are the Income and Substitution Effects Both Large or Both Small? ” NBER working paper 14208.CrossRefGoogle Scholar
Klößer, S., and Sekkel, R.. (2014). “International Spillovers of Policy Uncertainty,” Economics Letters, 124(3): 508–512.CrossRefGoogle Scholar
Kollmann, R. (2013). “Global Banks, Financial Shocks, and International Business cycles: Evidence from an Estimated Model,” Journal of Money, Credit and Banking, 45(2): 159–195.CrossRefGoogle Scholar
Kollmann, R., Enders, Z., and Muller, G. J.. (2011). “Global Banking and International Business Cycles,” European Economic Review, 55: 407-26.CrossRefGoogle Scholar
Leduc, S., and Liu, Z.. (2016). “Uncertainty Shocks are Aggregate Demand Shocks,” Journal of Monetary Economics, 82: 20–35.CrossRefGoogle Scholar
Liu, Z., and Spiegel, M. M.. (2015). “Optimal Monetary Policy and Capital Account Restrictions in a Small Open Economy,” IMF Economic Review, 63(2): 298–324.CrossRefGoogle Scholar
Luk, P., Cheng, M., Ng, P., and Wong, K.. (2020). “Economic Policy Uncertainty Spillovers in Small Open Economies: the Case of Hong Kong,” Pacific Economic Review, 25(1): 21–46.10.1111/1468-0106.12283CrossRefGoogle Scholar
Miranda-Agrippino, S., and Rey, H.. (2020). “U.S. Monetary Policy and the Global Financial Cycle,” Forthcoming in Review of Economics Studies.Google Scholar
Mumtaz, H., and Theodoridis, K.. (2015). “The International Transmission of Volatility Shocks: An Empirical Analysis,” Journal of the European Economic Association, 13(3): 512–533.CrossRefGoogle Scholar
Perri, F., and Quadrini, V.. (2018). “International Recessions,” American Economic Review, 108(4-5): 935-84.CrossRefGoogle Scholar
Obstfeld, M. (2015). “Trilemmas and Tradeoffs: Living with Financial Globalization,” In Global Liquidity, Spillovers to Emerging Markets and Policy Responses edited by Raddatz, C., Saravia, D. and Ventura, J.. Central bank of Chile.Google Scholar
Rey, H. (2018). “Dilemma not Trilemma: the Global Financial Cycle and Monetary Policy Independence,” National Bureau of Economic Research Working Paper No. 21162.Google Scholar
Schmitt-Grohe, S., and Uribe, M.. (2007). “Optimal Simple and Implementable Monetary and Fiscal Rules,” Journal of Monetary Economics, 54: 1702-25.CrossRefGoogle Scholar
Schmitt-Grohe, S., and Uribe, M.. (2012). “Managing Currency Pegs,” American Economic Review (Papers and Proceedings), 102: 192-97.CrossRefGoogle Scholar
Shin, H. S. (2012). “Global Banking Glut and Loan Risk Premium,” IMF Economic Review, 60: 155–192.CrossRefGoogle Scholar
Stock, J. H., and Watson, M. W.. (2012). “Disentangling the Channels of the 2007-09 Recession,” Brookings Papers on Economic Activity, 44: 81–135.CrossRefGoogle Scholar
Takats, E. (2010). “Cross-border Bank Lending to Emerging Market Economies,” mimeo, background paper for the BIS Meeting of Deputy Governors on “The international banking crisis and domestic financial intermediation in emerging economics,” Basel, January.Google Scholar
Townsend, R. (1979). “Optimal Contracts and Competitive Markets with Costly State Verification,” Journal of Economic Theory, 21: 265-93.CrossRefGoogle Scholar
Ueda, K. (2012). “Banking Globalization and International Business Cycles: Cross-Border Chained Credit Contracts and Financial Accelerators,” Journal of International Economics, 86(1): 1–16.CrossRefGoogle Scholar