Capital controls, domestic macroprudential policy and the bank lending channel of monetary policy
Author(s)
Fabiani, Andrea
Pineros, Martha Lopez
Peydro, Jose-Luis
Soto, Paul E
Type
Journal Article
Abstract
We study how capital controls and domestic macroprudential policy tame credit supply booms, either directly or by enhancing the local bank-lending channel of monetary policy. We exploit credit registry data and the introduction of capital controls on foreign exchange (FX) debt inflows and increase of reserve requirements on domestic bank deposits in Colombia during a boom. We find that capital controls strengthen the bank-lending channel. Increasing the local monetary policy rate widens the interest rate differential with the U.S.; hence, relatively more FX-indebted banks carry-trade cheap FX-funds with expensive peso lending, especially towards riskier firms. Capital controls tax FX-debt and break the carry-trade. Differently, raising reserve requirements on domestic deposits directly reduces credit supply, particularly for riskier firms, rather than enhancing the bank-lending channel. Importantly, banks differentially finance credit with domestic vis-à-vis FX-financing; hence, capital controls and domestic macroprudential policy complementarily mitigate the credit boom and related bank risk-taking.
Date Issued
2022-11-01
Date Acceptance
2022-08-12
Citation
Journal of International Economics, 2022, 139, pp.1-32
ISSN
0022-1996
Publisher
Elsevier
Start Page
1
End Page
32
Journal / Book Title
Journal of International Economics
Volume
139
Copyright Statement
© 2022 Published by Elsevier B.V.
Identifier
https://www.webofscience.com/api/gateway?GWVersion=2&SrcApp=PARTNER_APP&SrcAuth=LinksAMR&KeyUT=WOS:000899896200006&DestLinkType=FullRecord&DestApp=ALL_WOS&UsrCustomerID=a2bf6146997ec60c407a63945d4e92bb
Subjects
Business & Economics
Capital controls
Carry trade
CREDIT BOOMS
Credit supply
DEVIATIONS
DOLLAR
Economics
FINANCIAL CRISES
FLOWS
IMPACT
LEVERAGE
Macroprudential and monetary policy
RATES
Risk-taking
SHOCKS
Social Sciences
TRILEMMA
Publication Status
Published
Article Number
ARTN 103677
Date Publish Online
2022-08-18