International Finance Discussion Papers (IFDP)
November 2024
How Does Fiscal Policy affect the Transmission of Monetary Policy into Cross-border Bank Lending? Cross-country Evidence
Swapan-Kumar Pradhan, Előd Takáts, Judit Temesvary
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
DOI: https://doi.org/10.17016/IFDP.2024.1400
PDF: Full Paper
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