Exchange rates and the international credit channel: Some facts on bank lending

Abstract

When exchange rates are used as anchors of monetary policy, is there a "credit channel" mechanism operating through international financial markets amplifying bank lending? We observe that private sector credit tends to increase after episodes of exchange rate pegging and we ask whether this effect is more pronounced than standard macroeconomic theory would lead to expect. We conjecture that an "international credit channel" might be operating and we analyze how spreads between domestic and foreign interest rates impact domestic crediting and whether "balance sheet effects" are transmitted through the exchange rate policy. Using panel data for 128 countries from 1970 to 2000, we analyze the behavior of main financial aggregates and of interest rates around 125 episodes of exchange rate stabilization and show that spreads between domestic and foreign interest rates as well as the real effective exchange rate are affected by the policy switch. Our findings are supportive of the significant impact of an "international credit channel" on banks domestic lending decisions. © Jorge Guillen, 2011.