How does fiscal policy affect the transmission of monetary policy into cross-border bank lending? Cross-country evidence

Pradhan, Swapan-Kumar, Takáts, Előd and Temesvary, Judit (2024) How does fiscal policy affect the transmission of monetary policy into cross-border bank lending? Cross-country evidence. International Finance Discussion Papers (1400). Board of Governors of the Federal Reserve System.

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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.

Item Type:	Monograph (Discussion Paper)
Divisions:	LSE
Subjects:	H Social Sciences > HG Finance
JEL classification:	E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F42 - International Policy Coordination and Transmission G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages G - Financial Economics > G3 - Corporate Finance and Governance > G38 - Government Policy and Regulation
Date Deposited:	21 Jan 2025 15:51
Last Modified:	21 Jan 2025 15:51
URI:	http://eprints.lse.ac.uk/id/eprint/126988

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