US or Domestic Monetary Policy: Which Matters More for Financial Stability?

• Published in: IMF economic review Vol. 68; no. 1; pp. 35 - 65
• Main Authors: Cecchetti, Stephen G., Mancini-Griffoli, Tommaso, Narita, Machiko, Sahay, Ratna
• Format: Journal Article
• Language: English
• Published: London Palgrave Macmillan UK 01.04.2020; Palgrave Macmillan Ltd. (Springer); Palgrave Macmillan
• Subjects: American dollar; Banking; Capital Markets; Dollar (United States); Domestic policy; Economic aspects; Economic Policy; Economic stabilization; Economics; Economics and Finance; Financial institutions; Financial risk; Foreign banks; International Economics; Laws, regulations and rules; Macroeconomics/Monetary Economics//Financial Economics; Management; Monetary policy; Policy making; Political aspects; Research Article; United States; United States > US; G23; E52; E44; G21; G32
• ISSN: 2041-4161; 2041-417X
• DOI: 10.1057/s41308-020-00108-2

We study the impact of sustained monetary policy easing on risk-taking behavior using firm-level data for nearly 1000 financial institutions in 21 countries over 15 years. We find that both banks and nonbanks increase leverage following domestic monetary policy easing. Surprisingly, following easing in the USA (but not in the euro area), leverage in non-US firms increases as well, by more than it does following a domestic easing. We go on to show that spillovers from US policy are stronger in countries that are more financially developed, less open to trade, and have smaller gross US dollar liabilities. These results lend support to concerns raised by emerging market policymakers that US monetary policy spillovers complicate domestic policymakers’ decisions.