U.S. Monetary Policy and Emerging Market Credit Cycles U.S. Monetary Policy and Emerging Market Credit Cycles

Foreign banks’ lending to firms in emerging market economies (EMEs) is large and denominated primarily in U.S. dollars. This creates a direct connection between U.S. monetary policy and EME credit cycles.

For emerging market economies (EMEs), foreign bank loans denominated primarily in U.S. dollars are by far the most important category of cross-border capital flows. As of 2015, International Monetary Fund (IMF) data indicate that loans represent about half of all external liabilities of emerging market countries. By comparison, foreign bond and equity portfolio investments combined represent only about 20 percent. Much of the foreign lending comes from banks headquartered in developed economies: Bank for International Settlements (BIS) data show that roughly a third of all external liabilities of the emerging markets countries are held by U.S., European, and Japanese banks. Moreover, the volume of these claims has nearly doubled since the onset of the global financial crisis, reaching about $7 trillion in 2016.

Given the economic significance of U.S. dollar lending by global banks to EME firms, this paper examines the extent to which U.S. monetary policy plays an important role as a "push factor" for the credit cycles in these economies.

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