Contents
This paper investigates the international spillovers of fiscal shocks via the cross-border bank lending channel. We estimate the dynamic response of cross-border bank lending to exogenous fiscal (spending and revenue) shocks by applying the local projection method to data on cross-border banking flow from the Bank for International Settlements Locational Banking Statistics, allowing for a cleaner identification of causal effects. We find that expansionary domestic fiscal shocks lead to an economically and statistically significant increase in cross-border bank lending to other counties. These effects depend on the sign of the shocks and the economic conditions of source countries at the time of the shocks. In particular, we find that: (i) fiscal shocks tend to have larger effects during periods of recessions than expansions in the source economy; and (ii) the adverse effect of fiscal consolidation on cross-border banking flows is larger than the positive effect of the same size of the fiscal expansion. In contrast, we do not find systematic and statistically significant differences in spillover effects across recipient countries depending on their exchange rate regime, although capital controls seem to play some moderating role.
Fiscal Shocks, Cross-border Banking Flows, International Spillovers