No.214 Monetary Policy Spillover Into a Developing Country When the US Federal Fund Rate Rises: Evidence on a Bank Lending Channel

  • #Working Papers

Banks in developing countries are highly dependent on funding sources from abroad, and such high dependency on external funding could cause vulnerability to the sector by channeling the effects of foreign monetary policies to domestic bank lending.

In this paper, we study the international transmission of monetary policy of US and banks’ major shareholders’ home countries into bank lending in Cambodia, using data on banks’ loan disbursement and balance sheets from 2013Q1 to 2019Q2. Cambodia is one of the least developed countries in the south-east Asian region, while its economy is highly dollarized and capital movement is free. This environment is likely to allow banks to transmit financial shocks into domestic lending.

As a result, we find that US monetary policy affected domestic lending through the channel of foreign funding exposure, suggesting that Cambodian banks with foreign funding exposure are likely to reduce lending when there is a rise in the cost of funding from abroad. We also find that an increase in the US monetary policy rate is associated with increases in loan disbursements in secured loans, USD currency loans, and retail loans, suggesting the monetary transmission also affected loan reallocations by changing risk-taking behavior in bank lending. In addition, we find that these results are robust for US monetary policy effects, but weak and not robust for monetary policies of banks’ major shareholders’ home countries.

Keywords: Bank Lending Channel, International Monetary Policy Transmission, Capital Inflow, Developing Countries, Dollarization, Cambodia

AIBA Daiju
Date of issuance
July 2020
Related areas
  • #Asia
  • #Economic Policy
Research area
Economic Growth and Poverty Reduction
Research project