Working Paper: NBER ID: w23536
Authors: Mary Amiti; Patrick McGuire; David E. Weinstein
Abstract: What is the role for supply and demand forces in determining movements in international banking flows? Answering this question is crucial for understanding the international transmission of financial shocks and formulating policy. This paper addresses the question by using the method developed in Amiti and Weinstein (forthcoming) to exactly decompose the growth in international bank credit into common shocks, idiosyncratic supply shocks and idiosyncratic demand shocks for the period 2000-2016. A striking feature of the global banking flows data can be characterized by what we term the “Anna Karenina Principle”: all healthy credit relationships are alike, each unhealthy credit relationship is unhealthy in its own way. During non-crisis years, bank flows are well-explained by a common global factor and a local demand factor. But during times of crisis flows are affected by idiosyncratic supply shocks to a borrower country’s creditor banks. This has important implications for why standard models break down during crises.
Keywords: International banking; Bank credit; Supply shocks; Demand shocks; Financial crises
JEL Codes: F34; G01; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| healthy credit relationships (G51) | consistency across contexts (L15) |
| unhealthy credit relationships (G51) | variation in outcomes (I14) |
| common global factor (F62) | international banking flows (F65) |
| local demand factor (R22) | international banking flows (F65) |
| idiosyncratic supply shocks (E39) | credit flows to borrower countries (F34) |
| idiosyncratic demand shocks (E39) | credit flows to borrower countries (F34) |
| supply shocks during crises (H12) | contractions in credit (E51) |
| banking system health (G21) | credit flows to borrower countries (F34) |