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Cross-country spillover effects of interest rate and credit constraint policies

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  • Nissinen, Juuso

Abstract

Both rising interest rates and tighter credit constraints decrease investors’ funding positions in a given currency and cause the currency to appreciate. I extend the Gabaix and Maggiori (2015) global multi-country currency and bond model and show that the policy interventions have opposite effects on the value of an alternative funding currency through investor positioning. Rising interest rates encourage investors to shift their positioning and cause the alternative currency to depreciate. Tightening credit conditions have the contrasting effect and prompt appreciation for both currencies. Empirical evidence on Japanese Yen returns is consistent with the model.

Suggested Citation

  • Nissinen, Juuso, 2024. "Cross-country spillover effects of interest rate and credit constraint policies," Finance Research Letters, Elsevier, vol. 66(C).
    • Handle: RePEc:eee:finlet:v:66:y:2024:i:c:s1544612324006470
    DOI: 10.1016/j.frl.2024.105617
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    More about this item

    Keywords

    Foreign exchange; International finance; Monetary policy; Funding constraints; Portfolio choice;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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