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GLOBAL BANK RISK AND MONETARY POLICY IN AN EMERGING ECONOMY

Published online by Cambridge University Press:  25 January 2021

Paul Luk
Paul Luk*
Affiliation:
Hong Kong Institute for Monetary and Financial Research
*
Address correspondence to: Paul Luk, Hong Kong Institute for Monetary and Financial Research, Units 1005–1011, 10th Floor, One Pacific Place, 88 Queensway, Hong Kong. E-mail: paulskluk@gmail.com. Phone: +852 9785 2821. Fax: +852 2878 7006.
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Abstract

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The global financial crisis was characterized by heightened financial risk in the USA, which spread to the rest of the world, including emerging economies. This paper constructs a core–periphery model with a global banking network and financial frictions. Due to a common-lender effect, when global banks lend to an emerging economy, heightened financial risk in the center depresses cross-border lending to the emerging economy, reducing real activities, and exacerbating monetary policy trade-offs. As financial markets become more integrated, exchange rate flexibility becomes less welfare enhancing and active capital account policy becomes more welfare enhancing.

Keywords

Global banksFinancial acceleratorUncertaintyCapital Controls
Type
Articles
Information
Macroeconomic Dynamics , Volume 26 , Issue 6 , September 2022 , pp. 1615 - 1646
Copyright
© Cambridge University Press 2021

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