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The bank lending channel in a partially dollarized economy :

Author

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  • Nada Mora

    (Federal Reserve Bank of Kansas City)

Abstract

This paper studies the transmission of monetary policy through the bank-lending channel in a partially dollarized banking system. Taking advantage of the cross-sectional and timeseries variation in individual Mexican bank balance sheets, I find that the deposits and loans of banks that have a larger share of foreign currency deposits are less sensitive to domestic monetary shocks, particularly for small banks. The results also suggest that banks with a larger foreign deposit share are more sensitive to foreign (U.S.) monetary shocks and Mexican country risk. The results indicate a novel way in which monetary policy has real effects in a partially dollarized economy: Not only are banks unable to easily replace insured deposits with other sources of funds because of information frictions (the conventional bank lending channel), but they are also unable to fully offset a loss of domestic currency deposits with foreign currency deposits. An online appendix is available.

Suggested Citation

  • Nada Mora, 2013. "The bank lending channel in a partially dollarized economy :," Journal of Applied Economics, Universidad del CEMA, vol. 16, pages 121-151, May.
    • Handle: RePEc:cem:jaecon:v:16:y:2013:n:1:p:121-151
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    File URL: https://ucema.edu.ar/publicaciones/download/volume16/mora.pdf
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    File URL: https://ucema.edu.ar/publicaciones/download/volume16/mora_appendix.pdf
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    Cited by:

    1. Juan‐Sebastian Corrales & Patrick Amir Imam, 2021. "Financial dollarization of households and firms: How does it differ by level of economic development?," Review of International Economics, Wiley Blackwell, vol. 29(4), pages 927-978, September.
    2. Steven Ongena & Ibolya Schindele & Dzsamila Vonnak, 2014. "In Lands of Foreign Currency Credit, Bank Lending Channels Run Through? The Effects of Monetary Policy at Home and Abroad on the Currency Denomination of the Supply of Credit," CERS-IE WORKING PAPERS 1424, Institute of Economics, Centre for Economic and Regional Studies.
    3. Aiba, Daiju, 2023. "Bank dependency on foreign funding and global liquidity shocks: The importance of US monetary policy for a developing country," Journal of Asian Economics, Elsevier, vol. 84(C).
    4. Ongena, Steven & Schindele, Ibolya & Vonnák, Dzsamila, 2021. "In lands of foreign currency credit, bank lending channels run through?," Journal of International Economics, Elsevier, vol. 129(C).

    More about this item

    Keywords

    monetary policy; bank lending channel; dollarization;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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