International Spillovers and Local Credit Cycles

Julian di Giovanni, Sebnem Kalemli-Ozcan, Mehmet Fatih Ulu, Yusuf Soner Baskaya

NBER Working Paper No. 23149
Issued in February 2017, Revised in September 2018
NBER Program(s):The Economic Fluctuations and Growth Program, The International Finance and Macroeconomics Program, The Monetary Economics Program

This paper studies the impact of the Global Financial Cycle (GFC) on domestic credit market conditions in a large emerging market, Turkey, over 2003-13. We use administrative data covering the universe of corporate loan transactions matched to firm and bank balance sheets to provide evidence on four facts that are critical in the transmission of the GFC to emerging markets: (1) uncovered interest parity (UIP) is violated at the firm-bank level - firms pay a lower interest rate when borrowing in foreign currency from their domestic banks; (2) the UIP risk premium, both at the firm-bank level and at the country level, strongly co-moves with the GFC over time; (3) during the boom phase of the GFC, the UIP risk premium falls and capital flows into Turkey, lowering domestic borrowing costs and leads to an expansion of credit for domestic firms; and (4) firm-bank level data on pledged collateral on new loan issuances show that borrowing constraints do not relax during the boom phase of the GFC due to higher collateral values. Rather, firms are able to borrow more due to lower borrowing costs on average, which increases their ability to pay back their loans. We show that the GFC can explain 43% of observed corporate credit growth during our sample period.

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Document Object Identifier (DOI): 10.3386/w23149

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