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Financial Globalization and Bank Lending: The Limits of Domestic Monetary Policy

Published online by Cambridge University Press:  03 June 2022

Jin Cao*
Norges Bank Research Department and CESifo
Valeriya Dinger
University of Osnabrück Department of Economics and the Leeds University Business School
* (corresponding author)
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Exploring bank-level data from a small open economy, we present evidence that global funding conditions limit the effectiveness of domestic monetary policy in terms of shaping both the volume and the riskiness of bank lending. We show that more favorable global funding conditions associated with a local currency appreciation encourage banks to increase lending, leverage up, take more risks, and thus insulate themselves from lean-against-the-wind domestic monetary policy. These results support the existence of a risk-taking channel of currency appreciation at the bank level.

Research Article
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This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (, which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington


We thank an anonymous referee, Joshua Aizenman, Farooq Q. Akram, André K. Anundsen, Söhnke M. Bartram, Henrik Borchgrevink, Miguel Boucinha, Markus Brunnermaier, Georgia Bush, Anusha Chari, Gianni De Nicolò, Julian di Giovanni, Mark Egan, Falko Fecht, Hans Gersbach, Linda Goldberg, Galina Hale, Jarrad Harford (the editor), Boris Hofmann, Gerhard Illing, Dirk Krueger, Ulrike Neyer, Steven Ongena, Jean-Charles Rochet, Kasper Roszbach, Anjan Thakor, Bent Vale, Francesco Vallascas, Andrea Vedolin, Jürgen von Hagen, and Frank Westermann as well as participants at seminars in Norges Bank, Bank of Lithuania, University of Munich, University of Zurich, Waseda University, 2020 ASSA Annual Meeting in San Diego, 2017 Annual Meeting of the Western Finance Association (WFA), 2019 Deutsche Bundesbank Conference “Financial Intermediation in a Globalized World,” 2017 Annual Meeting of Central Bank Research Association at Bank of Canada, 2017 CESifo Area Conference on Macro, Money and International Finance, 2017 Royal Economic Society Annual Conference, 2016 NBRE Spring Institute, 2016 ECB and Banco de Portugal workshop “Transmission and Effectiveness of Macroprudential Policies,” 2016 IFABS Barcelona Conference, and German Finance Association Annual Meeting, for useful comments and discussions. This article should not be reported as representing the views of Norges Bank. The views expressed are those of the authors and do not necessarily reflect those of Norges Bank.


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