The Rise of Dollar Credit in Emerging Market Economies and US Monetary Policy

Huang, Anni and Kishor, N. Kundan (2017): The Rise of Dollar Credit in Emerging Market Economies and US Monetary Policy.

Abstract

This paper examines the hypothesis that the boom in dollar credit in the emerging market economies is associated with excessively low interest rate in the US. For this purpose, we use a multivariate correlated unobserved component model that allows for correlation between shocks to dollar credit, interest rates and dollar index both in the short-run and in the long-run. In addition, it also provides us a quantitative estimate of the permanent and transitory movements in dollar credit in emerging markets, US interest rate and the dollar index. The results from this model do suggest that a temporary decline in interest rate and dollar index below their long-run levels are associated with an increase in dollar credit with a very high degree of negative correlation. The estimate of the cyclical component of the dollar credit in emerging market from our model captures the recent boom and bust in this market and compares favorably to a univariate trend-cycle decomposition benchmark.

• Item Type: MPRA Paper
• Language: English
• Keywords: Dollar Credit, Emerging Market Economies, Monetary Policy Spillover, Trend-Cycle Decomposition, State-Space Model, Kalman Filter
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E51 - Money Supply ; Credit ; Money Multipliers; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements; F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems; F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

References

[1]Avdjiev, S., McCauley, R., & McGuire, P. (2012). Rapid credit growth and international credit: Challenges for Asia (No. 377). Bank for International Settlements.

[2] Bhatt, V., & Kishor, N. K. (2015). Are all movements in food and energy prices transitory? Evidence from India. Journal of Policy Modeling, 37(1), 92-106.

[3] Black, F. (1995). Interest Rates as Options. The Journal of Finance, 50(5), 1371-1376.

[4] Borio, C. E., McCauley, R. N., & McGuire, P. (2011). Global credit and domestic credit booms. BIS Quarterly Review, September.

[5] Bruno, V., & Shin, H. S. (2016). Global dollar credit and carry trades: a firm-level analysis. Available at SSRN 2614074.

[6] Caballero, J., Panizza, U., & Powell, A. (2015). The second wave of global liquidity: Why are firms acting like financial intermediaries? (No. 10926). CEPR Discussion Papers.

[7] Chung, K., Lee, J. E., Loukoianova, E., Park, H., & Shin, H. S. (2015). Global liquidity through the lens of monetary aggregates. Economic Policy,30(82), 231-290.

[8] Farhi, E., Caballero, R., & Gourinchas, P. O. (2008). An Equilibrium Model of Global Imbalances and Low Interest Rates. American Economic Review,98(1).

[9] He, D.,& McCauley, R. N. (2013). Transmitting Global Liquidity to East Asia: Policy Rates, Bond Yields, Currencies and Dollar Credit (No. 152013).

[10] Hoffmann, A. (2014). Zero Interest Rate Policy and Unintended Consequences in Emerging Markets. The World Economy, 37(10), 1367-1387.

[11] Kim, C. J., & Nelson, C. R. (1999). State-space models with regime switching: classical and Gibbs-sampling approaches with applications (Vol. 2). Cambridge, MA:MIT press.

[12] Landau, J. P. (2011). Global liquidity-concept, measurement and policy implications.CGFS Papers, 45.

[13] Leijonhufvud, C. (2007). Financial Globalisation and Emerging Markets Volatility. The World Economy, 30(12), 1817-1842.

[14] Lombardi, M., & Zhu, F. (2014). A shadow policy rate to calibrate US monetary policy at the zero lower bound (No. 452). Bank for International Settlements.

[15] McCauley, R. N., McGuire, P., & Sushko, V. (2015). Dollar credit to emerging market economies. BIS Quarterly Review December.

[16] McCauley, R. N., McGuire, P., & Sushko, V. (2015). Global dollar credit: links to US monetary policy and leverage. Economic Policy, 30(82), 187-229.

[17] McKinnon, R. (2010). Rehabilitating the unloved dollar standard. Asian-Pacific Economic Literature, 24(2), 1-18.

[18] McKinnon, R., & Schnabl, G. (2012). China and Its Dollar Exchange Rate: A Worldwide Stabilising In uence? 1. The World Economy, 35(6), 667-693.

[19] McKinnon, R. I. (2013). The Unloved Dollar Standard: From Bretton Woods to the Rise of China. Oxford University Press.

[20] Morley, J. C. (2007). The slow adjustment of aggregate consumption to permanent income. Journal of Money, Credit and Banking, 39(2-3), 615-638.

[21] Morley, J. C., Nelson, C. R., & Zivot, E. (2003). Why are the Beveridge-Nelson and unobserved-components decompositions of GDP so different?.Review of Economics and Statistics, 85(2), 235-243.

[22] Obstfeld, M. (2010). The immoderate world economy. Journal of international money and finance, 29(4), 603-614.

[23] Santos, T. (2015). Credit booms: implications for the public and the private sector (No. 481). Bank for International Settlements.

[24] Shin, H. S. (2014). The second phase of global liquidity and its impact on emerging economies. In Volatile Capital Flows in Korea (pp. 247-257). Palgrave Macmillan US.

[25] Sinclair, T. M. (2009). The relationships between permanent and transitory movements in US output and the unemployment rate. Journal of Money, Credit and Banking, 41(23), 529-542.

[26] Taylor, J. (2007),Housing and Monetary Policy," Working Paper, Stanford University.

[27] Wu, J. C.,& Xia, F. D. (2016). Measuring the macroeconomic impact of monetary policy at the zero lower bound. Journal of Money, Credit and Banking, 48(2-3), 253-291.