Working Paper: CEPR ID: DP12501
Authors: Ambrogio Cesabianchi; Andrea Ferrero; Alessandro Rebucci
Abstract: House prices and exchange rates can potentially amplify the expansionary effect of capital inflows by inflating the value of collateral. We first set up a model of collateralized borrowing in domestic and foreign currency with international financial intermediation in which a change in leverage of global intermediaries leads to an international credit supply increase. In this environment, we illustrate how house price increases and exchange rates appreciations contribute to fueling the boom by inflating the value of collateral. We then document empirically, in a Panel VAR model for 50 advanced and emerging countries estimated with quarterly data from 1985 to 2012, that an increase in the leverage of US Broker-Dealers also leads to an increase in cross-border credit flows, a house price and consumption boom, a real exchange rate appreciation and a current account deterioration consistent with the transmission in the model. Finally, we study the sensitivity of the consumption and asset price response to such a shock and show that country differences are associated with the level of the maximum loan-to-value ratio and the share of foreign currency denominated credit.
Keywords: cross-border claims; capital flows; credit supply shock; leverage; exchange rates; house prices; international financial intermediation
JEL Codes: C32; E44; F44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Country characteristics (loan-to-value ratios, foreign currency liabilities) (F34) | Sensitivity of consumption and asset price responses to credit supply shocks (E44) |
| Increase in the leverage of U.S. broker-dealers (G24) | Increase in cross-border credit flows (F65) |
| Increase in the leverage of U.S. broker-dealers (G24) | House price boom (R31) |
| Increase in the leverage of U.S. broker-dealers (G24) | Consumption boom (E21) |
| Increase in the leverage of U.S. broker-dealers (G24) | Real exchange rate appreciation (F31) |
| Increase in the leverage of U.S. broker-dealers (G24) | Current account deterioration (F32) |
| International credit supply shock (F65) | Variance in macroeconomic variables (E39) |