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GLOBAL BANK RISK AND MONETARY POLICY IN AN EMERGING ECONOMY

Published online by Cambridge University Press:  25 January 2021

Paul Luk*
Affiliation:
Hong Kong Institute for Monetary and Financial Research
*
Address correspondence to: Paul Luk, Hong Kong Institute for Monetary and Financial Research, Units 1005–1011, 10th Floor, One Pacific Place, 88 Queensway, Hong Kong. E-mail: [email protected]. Phone: +852 9785 2821. Fax: +852 2878 7006.
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Abstract

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The global financial crisis was characterized by heightened financial risk in the USA, which spread to the rest of the world, including emerging economies. This paper constructs a core–periphery model with a global banking network and financial frictions. Due to a common-lender effect, when global banks lend to an emerging economy, heightened financial risk in the center depresses cross-border lending to the emerging economy, reducing real activities, and exacerbating monetary policy trade-offs. As financial markets become more integrated, exchange rate flexibility becomes less welfare enhancing and active capital account policy becomes more welfare enhancing.

Type
Articles
Copyright
© Cambridge University Press 2021

References

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