Recessions and recoveries: Multinational banks in the business cycle

• Published in: Journal of monetary economics Vol. 117; pp. 203 - 219
• Main Authors: Cao, Qingqing, Minetti, Raoul, Olivero, María Pía, Romanini, Giacomo
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.01.2021
• Subjects: Business cycle dynamics; Multinational banks; Recoveries; Multinational banks; Business cycle dynamics; E44; Recoveries
• ISSN: 0304-3932; 1873-1295
• DOI: 10.1016/j.jmoneco.2020.01.002

•We study impact of multinational banks on the dynamics, depth and duration of business cycles.•After banking shocks, multinational banks moderate depth of recessions but slow down recoveries.•We calibrate the model to Polish data and quantify the effects.•The model predictions are broadly consistent with evidence from a large panel of countries. How does the expansion of multinational banks influence the business cycle of host countries? We study an economy where multinational banks can transfer liquidity across borders through internal capital markets but are hindered in their allocation of liquidity by limited knowledge of local firms’ assets. We find that, following domestic banking shocks, multinational banks moderate the depth of the contraction but slow down the recovery. A calibration to Polish data suggests that multinational banks reduce the average depth of recessions by about 5% but increase their duration by 10%. The predictions are broadly consistent with evidence from a large panel of countries.