u.s. monetary policy and emerging market credit cycle · than emerging countries. monetary policy...
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U.S. Monetary Policy and Emerging MarketCredit Cycle
Falk BrauningFederal Reserve Bank of Boston
Victoria IvashinaHarvard University
November 3, 2017
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QUESTION
1. How does monetary policy in the United States affect credit in emergingmarkets vis-a-vis developed markets?
2. Answer: An interest rate change in the US has a larger impact on dollarscredit to firms in emerging markets than in developed markets.
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Graphical illustration
United StatesControl dollar interest rates
BrazilControl brazilian
real interest rates
EuropeControl Euro interest rates
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EMPIRICAL APPROACH
• Data on syndicated loans by banks to firms in developed and emergingcountries.
ln(DollarLoansfbt) = βd × FFrate × DevelopedDummy +
βe × FFrate × EmergingDummy
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COMMENTS
• Interesting empirical finding.
• I do not have reasons to question the empirical approach.
• The paper can do much more: the empirical findings raise more questionsthan the paper answers.
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QUESTIONS
• Why more dollar credit goes to emerging markets than to developedmarkets?
• Is the increase in ‘dollar’ credit associated to an increase in ‘total’ creditto firms?
• Does it affect the real economy of emerging economies?
• Does US monetary policy affect the likelihood of future crises in emergingcountries?
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Why more dollars go to emerging countries?
Three possible channels related to:
1. Monetary policy synchronization;
2. Macroeconomic synchronization;
3. Substitution of dollars with other foreign currencies.
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Hypothesis I: Monetary policy synchronization
• US monetary policy may be more synchronized with developed countriesthan emerging countries.
• When the US interest rate falls, interest rates on local currencies also fallin other developed countries, but not necessarily in emerging economies.
• Thus, firms in developed countries do not have an incentive to substitutedollars with local currency loans.
• But firms in emerging markets have an incentive to substitute localcurrency loans with dollar loans.
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Graphical illustration
United StatesControl dollar interest rates
BrazilControl brazilian
real interest rates
EuropeControl Euro interest rates
![Page 10: U.S. Monetary Policy and Emerging Market Credit Cycle · than emerging countries. Monetary policy simply responds to the state of the real economy. So low interest rates in the US](https://reader034.vdocuments.mx/reader034/viewer/2022050223/5f68f5e75308374dc571e3f2/html5/thumbnails/10.jpg)
How can this be captured?
ln(DollarLoansfbt) = βd × FFrate × DevelopedDummy +
βe × FFrate × EmergingDummy +
α× (LocalRate-FFrate)
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Hypothesis II: Macroeconomic synchronization
• The US economy could be more synchronized with developed countriesthan emerging countries.
• Monetary policy simply responds to the state of the real economy. Solow interest rates in the US may reflect sluggish growth rates in the US(and likely in other developed countries).
• Because emerging economies are less synchronized with the US, banksinvest more in still growing emerging economies.
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Graphical illustration
United StatesControl dollar interest rates
BrazilControl brazilian
real interest rates
EuropeControl Euro interest rates
![Page 13: U.S. Monetary Policy and Emerging Market Credit Cycle · than emerging countries. Monetary policy simply responds to the state of the real economy. So low interest rates in the US](https://reader034.vdocuments.mx/reader034/viewer/2022050223/5f68f5e75308374dc571e3f2/html5/thumbnails/13.jpg)
How can this be captured?
ln(DollarLoansfbt) = βd × FFrate × DevelopedDummy +
βe × FFrate × EmergingDummy +
α× (LocalGrowth-USGrowth)
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Hypothesis III: Substitution dollar debt with otherforeign currency debt
• Low US interest rates induce a substitution in emerging countries of Eurodenominated debt with dollar debt.
• Since emerging countries demand less euro denominated debt, the supplyof Euro debt in Europe increases. So European firms borrow more inEuro and less in dollars.
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Graphical illustration
United StatesControl dollar interest rates
BrazilControl brazilian
real interest rates
EuropeControl Euro interest rates
![Page 16: U.S. Monetary Policy and Emerging Market Credit Cycle · than emerging countries. Monetary policy simply responds to the state of the real economy. So low interest rates in the US](https://reader034.vdocuments.mx/reader034/viewer/2022050223/5f68f5e75308374dc571e3f2/html5/thumbnails/16.jpg)
CONCLUSION
• Interesting empirical findings.
• However, without further empirical exploration, the contribution of thepaper is somewhat limited.
• I am looking forward to see further empirical and possibly theoreticalexploration.