Monetary Policy Spillover into a Developing Country When the US Federal Fund Rate Rises: Evidence on a Bank Lending Channel
Date
2020-08-19
Authors
Aiba, Daiju
Journal Title
Journal ISSN
Volume Title
Publisher
JICA Ogata Sadako Research Institute for Peace and Development
Abstract
Banks in developing countries are highly dependent on funding sources from abroad, and such
high dependency on external funding could cause vulnerability to the sector by channeling the
effects of foreign monetary policies to domestic bank lending. In this paper, we study the
international transmission of monetary policy of US and banks’ major shareholders’ home
countries into bank lending in Cambodia, using data on banks’ loan disbursement and balance
sheets from 2013Q1 to 2019Q2. Cambodia is one of the least developed countries in the
south-east Asian region, while its economy is highly dollarized and capital movement is free.
This environment is likely to allow banks to transmit financial shocks into domestic lending.
As a result, we find that US monetary policy affected domestic lending through the channel of
foreign funding exposure, suggesting that Cambodian banks with foreign funding exposure are
likely to reduce lending when there is a rise in the cost of funding from abroad. We also find
that an increase in the US monetary policy rate is associated with increases in loan
disbursements in secured loans, USD currency loans, and retail loans, suggesting the monetary
transmission also affected loan reallocations by changing risk-taking behavior in bank lending.
In addition, we find that these results are robust for US monetary policy effects, but weak and
not robust for monetary policies of banks’ major shareholders’ home countries.
Description
Monetary Policy
Keywords
Bank Lending Channel , International Monetary Policy Transmission , Capital Inflow , Developing Countries , Dollarization , Cambodia