international credit supply shocks

International Credit Supply Shocks

A. Cesa-Bianchi1 A. Ferrero2 A. Rebucci3

1Bank of England and Center for Macroeconomics2Oxford University

3Johns Hopkins Carey Business School and NBER

Central Bank Research Associations Boston Policy Workshop, 9 July 2017

*The views expressed in this paper do not necessarily reflect the position of the Bank of England.

Capital inflows associated with expansions and assetprice booms, but not all countries affected equally

Cross-border Credit

-3 -2 -1 0 +1 +2 +3

-10

0

10

House Price

-3 -2 -1 0 +1 +2 +3-10

-5

0

5

Equity Price

-3 -2 -1 0 +1 +2 +3

-30

-20

-10

0

10

Real Eff. Exch. Rate

-3 -2 -1 0 +1 +2 +3

-2

0

2

Real Exch. Rate (USD)

-3 -2 -1 0 +1 +2 +3

-5

0

5

Current Account / GDP

-3 -2 -1 0 +1 +2 +3

-4

-2

0

GDP

-3 -2 -1 0 +1 +2 +3

0

2

4

6

Consumption

-3 -2 -1 0 +1 +2 +3

0

2

4

6

Real Short-term Int. Rate

-3 -2 -1 0 +1 +2 +30

5

All Economies Advanced Economies Emerging Economies Overall

Motivation 2

Countries differ in important dimensions, and theEMs vs. AEs divide may not be whole story

Mortgage Debt / GDP

RU

SS

VN

AR

GB

GR

IDN

PE

RU

KR

BR

AP

OL

CZ

EIN

DS

VK

LT

UP

HL

MA

RH

RV

HU

NM

EX

CH

NC

OL

ES

TL

VA

ITA

CH

LG

RC

TH

A KO

RIS

RZ

AF

FR

AT

WN

AU

TB

EL

ML

TM

YS

LU

X FIN J

PN

ES

P HK

GC

AN

IRL

DE

UP

RT

NO

RS

WE

SG

PA

US G

BR

ISL

US

AN

ZL

DN

KC

HE

NL

D

0

20

40

60

80

Home Ownership

CH

E CO

LH

KG

DE

U JP

NA

UT

FR

AZ

AF

NZ

LF

IND

NK

ME

XA

RG

AU

SC

HL

NL

DP

ER

GB

RIS

RID

NIN

DB

RA

SW

ET

HA

LU

XIR

LB

EL PR

TIT

AG

RC

SV

NE

SP

CZ

EIS

LP

HL

ML

TP

OL

SR

BR

US

UR

YL

VA

ES

TN

OR

TW

NB

GR

CH

NS

VK

SG

PH

RV

HU

NL

TU

40

50

60

70

80

90

100

Share of foreign currency debt

US

AD

EU

ITAA

UT

ES

PB

EL

FR

AP

RT FIN

NL

DG

RC LU

XIR

LJP

NC

HE

DN

KN

ZL

SW

EA

US

CA

N GB

RN

OR

ML

TC

ZE

ZA

FT

WN

SG

PH

KG

PO

LC

HN

MY

SK

OR

TH

AH

UN

ISR

ME

XU

KR

BR

AIN

DID

NR

US

SV

KP

HL

ISL

SR

BL

VA

HR

VC

HL

CO

LS

VN

ES

TP

ER

AR

GL

TU

MA

RB

GR

UR

Y

0

20

40

60

80

100

Max Loan to Value (LTV)

HR

VC

OL

HK

GH

UN

KO

RS

VN

UR

YA

RG

AU

TC

HN

DN

KF

IND

EU

GR

CIT

AJP

NL

UX

MY

SM

LT

PH

LS

GP

CH

EB

GR NZ

LN

OR BR

AE

ST

IDN

PR

T CA

NIS

RS

WE AU

SB

EL

CZ

EF

RA

ISL

IRL

LV

AL

TU

ME

XP

OL

RU

SZ

AF

ES

PT

HA

UK

RU

SA

IND

GB

RN

LD

40

60

80

100

120

Motivation 3

This paper

I Focuses on one particular shock: international credit supply

• A push shock that is expansionary, both in our model and in the data

I Theory: sets up a open economy model with housing and collateralizedborrowing in foreign or domestic currency and international financialintermediation

• International credit supply shock brought about by changes in leverageconstraint of global banks

• Possible amplification role for both house prices and exchange rates

I Empirics: quarterly panel VAR model for more than 50 countries

• Shock identified with changes in leverage of US broker-dealers

• Study trasmission and relative importance of this shock for the typicaleconomy

• Investigate differences in country countries’ responses relative tocharacteristics we can pin in both the model and the data

Contribution 4

Main Results

I Model:

• International credit supply shock is expansionary

• Real exchange rate appreciate

• If constraint binds, house prices increase (and yields decline) and amplifyinitial shock

• Transmission stronger the higher the LTV ratio and the share of FX liabilities

I PVAR:

• Shock is expansionary like in the model, and has sizable impact on the typicaleconomy

• Shock explains a significant fraction of macroeconomic and asset pricevariance

• Heterogeneity associated with share of foreign currency liabilities andcharacteristics of the housing market

I Important implication: LTV ratios and FX shares, which are related tomacro-prudential policy, are linked to final outcomes

Main results and Related Literature 5

Related Literature

I Global financial cycle and drivers of leverage:

• Cetorelli and Goldberg (2011, 2012); Rey (2013, 2016); Bruno and Shin(2015); Dedola, Rivolta, and Stracca (2015); Forbes, Reinhart, and Wieladek(2016); Aoki, Benigno, and Kiyotaki (2016); Boz and Mendoza (2014).

I House prices and capital flows into the United States

• Aizenman and Jinjarak (2009); Gete (2009); Bernanke (2010); Justiniano,Primiceri and Tambalotti (2014); Favilukis, Ludvigson and Van Nieuwerburgh(2017); Ferrero (2015).

I Sensitivity of consumption to asset price and credit shocks

• Jappelli and Pagano (1989); Almeida, Campello, and Liu (2006); Calza,Monacelli, and Stracca (2014); Berger, Guerrieri, Lorenzoni, and Vavra(2016); Mian, Sufi, and Verner (2016).

Main results and Related Literature 6

Outline

I Model

I Empirics

I Conclusions

Outline 7

Overview of the Model

I Two-period, two-country, two-good endowment economy with no uncertainty

I Impatient Home households (i ∈ [0, n])

• Borrow (in domestic of foreign currency) to finance housing and non-housingconsumption, subject to collateral constraint

I Patient Foreign households (i ∈ (n, 1])

• Save via deposits and equity in financial intermediaries

I Global financial intermediaries

• Channel funds from lenders to borrowers

• Fixed fraction of lending denominated in local currency

• Subject to leverage constraint (capital requirement)

Model 9

Households

I Home country (starts with zero initial credit)

max{c1,c2,h1,f}

u(c1) + βu(c2) + v(h1)

with β ∈ (0, 1) and h0 given, subject to

c1 + qh1 = pH1y + qh0 + b + s1f

c2 = pH2y− Rbb− s2Rf

where

ct ≡cα

Htc1−αFt

αα(1− α)1−α

I Collateral constraintb + s1f ≤ θqh1

Model 10

Households

I Foreign country (1 > β∗ > β)

max{c∗1 ,c∗2 ,d,e}

u(c∗1) + β∗u(c∗2)

subject to

c∗1 + d + e + ψ(e) = p∗F1y∗

c∗2 = p∗F2y∗ + Rdd + Ree + Π

with ψ′, ψ′′ > 0, and

c∗ =c∗α∗

H c∗1−α∗F

α∗α∗(1− α∗)1−α∗

Model 11

Global Financial Intermediaries

I Balance sheet

Assets Liabilities

Loans in Home currency b/s1 Deposits dLoans in Foreign currency f

Equity e

I Profits

Π = Rf +Rbbs2− Rdd− Ree− φ

(bs1

)where φ(·) is cost of swapping loans in Foreign currency (with φ′, φ′′ > 0)

I Leverage constraint (capital requirement)

e ≥ χ

(bs1

+ f)

Model 12

Equilibrium: Analytical Characterization

I Assume α = 1− (1− λ)n and α∗ = nλ

• λ ∈ (0, 1) measures degree of openness

• Take limit for n→ 0⇒ Home becomes small open economy

I Abstract from intermediaries portfolio problem

• Define η ≡ b/(s1f )⇒ 1 + η = Inverse share of foreign currency liabilities

• Take η as parameter

I All households are risk-neutral and housing (land) is in fixed supply

• u′(c) = c > 0 and h0 = h1 = 1

I Then, we can solve analytically for

• Terms of trade from goods market equilibrium (⇒ Real exchange rate)

• Credit demand and credit supply

Model 13

Summary of Equilibrium Conditions

I Credit Supply

R =1 + χψ′[χ(1 + η)f ]

β∗+

ηφ′(ηf )1 + η

I Credit Demand

R =

1β

s1

s2if s1(1 + η)f < θq

1β

s1

s2

[κ

s1(1 + η)f− 1− θ

θ

]if s1(1 + η)f = θq

I Real Exchange Rate

s1 =

[λy

λy∗ + (1− λ)(1 + η)f

]1−λ

s2 =

[λy

λy∗ − (1− λ)R(1 + η)f

]1−λ

Model 14

Parameters

Parameter Description Value

β Country H discount factor 0.9β∗ Country F discount factor 0.99κ Normalized marginal utility of housing 0.85λ Degree of openness 0.79θ LTV ratio 0.92η Share of foreign debt 0.43χ Capital requirement 0.1y = y∗ Endowments 1

I Pick adjustment cost parameters to target

• Interest rate on credit

• Equity premium

Model 15

Credit Market Equilibrium

0.566 0.567 0.568 0.569 0.57 0.571 0.572

Credit (f)

3

3.5

4

4.5

5

5.5LendingRate(R

)

A

Demand

Supply (A)

Model 16

We assume economy is constrained at point B

0.566 0.567 0.568 0.569 0.57 0.571 0.572

Credit (f)

3

3.5

4

4.5

5

5.5LendingRate(R

)

A

B

Demand

Supply (A)

Supply (B)

Model 17

International credit supply shock in the model (χ ↓):

0.566 0.567 0.568 0.569 0.57 0.571 0.5723

4

5

6

R

(a) Lending Rate

B

B'

0.566 0.567 0.568 0.569 0.57 0.571 0.5720.9594

0.9596

0.9598

0.96

s1

(b) Exch. Rate

BB'

0.566 0.567 0.568 0.569 0.57 0.571 0.5720.85

0.851

0.852

0.853

0.854

q

(c) House Price

B

B'

0.566 0.567 0.568 0.569 0.57 0.571 0.5721.94

1.945

1.95

1.955

c 1

(d) Consumption

BB'

Model 18

International credit supply shock in the Model:

I In response to reduction of equity requirement on global banks (χ ↓)• Home country experiences credit inflow and lending rate declines (f ↑, R ↓)

• Real exchange rate appreciates (s1 ↓)

• House prices increase (if borrowing constraint is binding) (q ↑)

• Consumptions expands (c1 ↑)

I Role of asset prices

+ Collateral valuation effect: With binding borrowing constraint, higher houseprices (and appreciated real exchange rate) amplify boom

+ Endowment valuation effect: Home agents’ endowment worth more becauseof real exchange rate appreciation

– Debt valuation effect: Home agents’ borrowing in foreign currency worthless because of real exchange rate appreciation

Model 19

Empirics

PVAR Model

I Objective: Study transmission, relative importance and differential incidenceof international credit supply

I VAR for country i is

Xit = ai + bit + cit2 + F1iXi,t−1 + uit,

where

Xit =[

LEVt KFit Cit HPit RERit CAit/Yit]

I All variables are in real terms and in levels

I MG estimation following Pesaran and Smith (1995) and Pesaran (2006).

Empirics 21

Variables and Data

I Macro variables: private consumption and current account to GDP

I Asset prices: rouse prices and real exchange rate vis-a-vis the US dollar

• Sample: 57 countries with quarterly house price series between 1977 and 2012(Source Cesa-Bianchi, Cespedes, and Rebucci, 2015) Data Sources

I International credit: total claims (all instruments, to financial andnon-financial sectors) of BIS reporting banks on country i

KFit =N

∑j=1(j 6=i)

KFij,t

I LEVt is leverage of US broker-dealers from the flows of funds

• Shock to LEVt ≡ International credit supply shock

Empirics 22

Four examples of international credit series

I

1980 1985 1990 1995 2000 2005 2010

0

100

200

300

Argentina

1980 1985 1990 1995 2000 2005 2010

0

50

100

150

Brazil

1980 1985 1990 1995 2000 2005 2010

0

50

100

Ireland

1980 1985 1990 1995 2000 2005 2010

0

50

100

Spain

I Important role of banks in international financial intermediation in the runup to the global financial crisis

• Well correlated with measures of global liquidity–Bruno and Shin, (2015) andCesa-Bianchi, Cespedes, and Rebucci (2015).

Empirics 23

Determinants of Leverage

LEVt = α + βxt + εt

xt

∆FFRt −2.617∗∗ −2.819∗∗ −2.876∗∗[−2.164] [−2.407] [−2.464]

umt −0.0126

[−0.172]VIXt −0.00275∗∗∗ −0.00289∗∗∗ −0.00264∗∗∗

[−2.744] [−2.940] [−2.649]RL

t − Rt −1.0078∗ −0.844[−1.711] [−1.377]

YUSt 1.304

[0.953]Yw

t 6.101[1.390]

α −0.00178 −0.000286 −0.0579∗ −0.0156 −0.00827 0.0192 0.0589∗∗∗ 0.0658∗∗∗[−0.221] [−0.0341] [2.568] [1.280] [−0.693] [−1.197] [2.669] [2.919]

Obs. 111 111 111 111 111 111 111 111Adj. R2 0.041 0.000 0.065 0.026 0.008 0.017 0.096 0.103

Empirics 24

Identification of push shock that shifts internationalsupply of credit in the data

1. We use shocks to LEVt

2. Changes in LEVt shift global supply of cross-border bank credit

• Bruno and Shin (2014)

• Consistent with shock to χ in our theoretical model

3. Arguably exogenous to conditions in individual country i

• Not driven by country-specific “pull” factors

• Drop US from our sample

4. Is endogenous to global conditions and we can control for that i

5. Implementation with country by country Choleski decomposition and LEVtorder first (robust to using LEVt as instrument)

Empirics 25

Tasmission consistent with model and the stylizedfacts of boom bust in capital flows

Leverage

5 10 15 20 25 30 35 40

0

2

4

6

Pe

rce

nt

Cross-border Credit

5 10 15 20 25 30 35 40

0

0.5

1

1.5

2

Consumption

5 10 15 20 25 30 35 40

0

0.1

0.2

0.3

0.4

House Price

5 10 15 20 25 30 35 40

Quarters

0

0.5

1

Pe

rce

nt

Real Exch. Rate

5 10 15 20 25 30 35 40

Quarters

-0.8

-0.6

-0.4

-0.2

0

Current Account

5 10 15 20 25 30 35 40

Quarters

-0.2

-0.1

0

Empirics 26

The shock explains fraction of variance larger than aUS monetary policy shock

Leverage

5 10 15 20 25 30 35 40

0

50

100

Pe

rce

nt

Cross-border Credit

5 10 15 20 25 30 35 40

0

10

20

30Consumption

5 10 15 20 25 30 35 40

0

5

10

15

20

House Price

5 10 15 20 25 30 35 40

Quarters

0

5

10

15

20

25

Pe

rce

nt

Real Exch. Rate

5 10 15 20 25 30 35 40

Quarters

0

5

10

15

20Current Account

5 10 15 20 25 30 35 40

Quarters

0

5

10

15

Empirics 27

Robustness to controlling for global factors in LEV

I Small open economy assumption rules out local factors can drive LEVt

• No single country can affect leverage of global banks

I But LEVt could be affected by globally synchronized factors

I Synchronized shocks should affect world GDP

• Augment vector of endogenous variables with world GDP

Xit =[

Ywt LEVt KFit Cit HPit RERit CAit/Yit

]• Shock to leverage of US broker-dealers still identified with Choleski

Empirics 28

IRFs to Leverage Shock (Robustness)

Leverage

5 10 15 20 25 30 35 40

0

2

4

6

Cross-border Credit

5 10 15 20 25 30 35 40

0

0.5

1

1.5

Consumption

5 10 15 20 25 30 35 40

Quarters

0

0.1

0.2

Pe

rce

nt

House Price

5 10 15 20 25 30 35 40

Quarters

0

0.2

0.4

0.6

0.8

Real Exch. Rate

5 10 15 20 25 30 35 40

Quarters

-0.8

-0.6

-0.4

-0.2

0

Current Account

5 10 15 20 25 30 35 40

Quarters

-0.2

-0.1

0

0.1

Empirics 29

Variance Decomposition (Robustness)

Leverage

5 10 15 20 25 30 35 40

0

50

100Cross-border Credit

5 10 15 20 25 30 35 40

0

5

10

15

20Consumption

5 10 15 20 25 30 35 40

Quarters

0

5

10

15

Pe

rce

nt

House Price

5 10 15 20 25 30 35 40

Quarters

0

5

10

15

20Real Exch. Rate

5 10 15 20 25 30 35 40

Quarters

0

5

10

15Current Account

5 10 15 20 25 30 35 40

Quarters

0

5

10

15

Empirics 30

Understanding Cross-Country Heterogeneity

I Conjecture: Country responses depend on

• Share foreign currency liabilities 1/(1 + η)

• Maximum LTV limit θ

I Derive sensitivity of response of endogenous variable to η and θ

∂2x∂χ∂η

and∂2x

∂χ∂θ

for x = {c1, q, s1}

I Compare theoretical predictions with data

• Scatter plot of peak IRFs of Ci, HPi, and RERi to eLEVt vs. θi and ηi in the

data

Empirics 31

LTV Ratios

I Prediction 1: A larger LTV ratio (higher θ) implies a higher sensitivity of Ci,HPi, and RERi to shocks to χ

• If constraint binds, higher θ leads to higher house price response, and hencelarger collateral effect and amplification

• Higher θ leads to higher credit and demand and hence larger real exchangerate response

40 60 80

(Home Ownership) x (max LTV)

-0.5

0

0.5

1

1.5

IRs (

Ma

x)

Consumption

Correlation: 0.3t-Statistic: 2.0

40 60 80


0

2

4

IRs (

Max)

House Price


40 60 80


-3

-2

-1

0

IRs (

Max)

Real Exch. Rate

Correlation: -0.2t-Statistic: -1.3

Empirics 32

FX Shares

I Prediction 2: A larger share of foreign currency debt (lower η) may imply ahigher sensitivity of Ci, HPi, and RERi to shocks to χ

• Lower η implies larger collateral valuation and debt valuation effects

• If collateral effect dominates valuation effect, higher η leads to higher creditand demand, and hence larger real exchange rate response, potentiallyamplifying the initial credit impulse

0.2 0.4 0.6 0.8


-0.5

0

0.5

1

1.5

IRs (

Ma

x)

Consumption


0.2 0.4 0.6 0.8


-2

0

2

4

IRs (

Max)

House Price


0.2 0.4 0.6 0.8


-3

-2

-1

0

IRs (

Max)

Real Exch. Rate

Correlation: -0.4t-Statistic: -3.7

Empirics 33

Conclusions

I International credit supply shock ⇒ Boom in receiving economy in themodel and in the data

I Theory: Source and trasmission of international credit supply shocks ⇒Variations of capital requirements that shift credit supply outward

• Credit expands, lending rates and housing yields decline, exchange rateappreciates and consumption increases

• House prices and exchange rates can amplify initial impulse via collateralconstraint

• The more so the higher the max LTV and share of FX liabilities

I Empirics: Identified shock to US broker-dealers’ leverage

• Increases cross-border credit and a domestic boom

• Shock explains a significant share of variance

• LTV ratios and FX shares associated with peak responses of consumption,house prices and exchange rates

• Macro-prudential policy could target them

Conclusions 34

Appendix

Data Sources: Countries

I 24 Advanced Economies: Australia, Austria, Belgium, Canada, Denmark,Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan,Luxembourg, Malta, Netherlands, New Zealand, Norway, Portugal, Spain,Sweden, Switzerland, UK, and US

I 33 Emerging Economies: Argentina, Brazil, Bulgaria, Chile, China,Colombia, Croatia, Czech Republic, Estonia, Hong Kong, Hungary, India,Indonesia, Israel, Korea, Latvia, Lithuania, Malaysia, Mexico, Morocco, Peru,Philippines, Poland, Russia, Serbia, Singapore, Slovakia, Slovenia, SouthAfrica, Taiwan, Thailand, Ukraine, and Uruguay

I Sample: 1970:Q1–2012:Q4 (subject to data availability)

Back

Appendix 36

Data Sources: Quantities

I Cross-border banking flows. Foreign claims (all instruments, in allcurrencies, locational by residence) of all BIS reporting banks vis-a-vis allsectors deflated by US consumer price inflation. Source: BIS.

I GDP. Real index. Source: OECD, IMF IFS, Bloomberg.

I Consumption. Real private final consumption index. Source: OECD, IMF,IFS, Bloomberg.

I Current account to GDP ratio. Current account balance divided bynominal GDP. Source: OECD, IMF IFS, Bloomberg.

Back

Appendix 37

Data Sources: Prices

I House prices. Nominal house prices deflated by consumer price inflation.Source: Cesa-Bianchi et al (2015, JMCB)

I Short-term interest rates. Short-term nominal market rates. A realex-post interest rate is obtained by subtracting consumer price inflation.Source: OECD, IMF, IFS, Bloomberg.

I Consumer prices. Consumer price index. Source: OECD, IMF IFS,Bloomberg.

I Equity prices. Equity price index deflated by consumer price inflation.Source: OECD, IMF IFS, Bloomberg.

I Exchange rate vis-a-vis US dollar. US dollars per unit of domesticcurrency. A real exchange rate is obtained with US and domestic consumerprice inflation. Source: Datastream.

I Real effective exchange rate. Index (such that a decline of the index is adepreciation). Source: IMF IFS, BIS, Bloomberg.

Back

Appendix 38

Cross-Border Credit: Banks vs. Non-Banks

1977 1981 1985 1989 1993 1997 2001 2005 2009 20130

5

10

15

20

25

30

US

Dollars

(T

rillio

ns)

Banks

Non-banks

Total

Back

Appendix 39

Boom-Bust Cycles in Cross-Border Credit

I Event study (Mendoza and Terrones, 2008):

I Boom (Bust) = At least 3 consecutive years of ∆ ln KFit > 0 (< 0)

I 134 boom, 81 bust, and 50 boom-bust episodes

I Observe economy’s behavior around boom-bust cycles’ peak

Appendix 40

Boom-Bust Cycles in Cross-Border Credit

Cross-border Credit

-3 -2 -1 0 +1 +2 +3-20

0

20

40House Price

-3 -2 -1 0 +1 +2 +3-10

0

10Equity Price

-3 -2 -1 0 +1 +2 +3-40

-20

0

20

Real Eff. Exch. Rate

-3 -2 -1 0 +1 +2 +3-10

-5

0

5Real Exch. Rate (USD)

-3 -2 -1 0 +1 +2 +3-5

0

5

10Current Account / GDP

-3 -2 -1 0 +1 +2 +3-2

0

2

4

GDP

-3 -2 -1 0 +1 +2 +3-5

0

5Consumption

-3 -2 -1 0 +1 +2 +3-5

0

5

10Real Short-term Int. Rate

-3 -2 -1 0 +1 +2 +3-4

-2

0

2

Mean Median

Back

Appendix 41

Event Study: Summary Statistics

Mean Across Episodes

Boom Bust Boom-bust

ALL AE EM ALL AE EM ALL AE EM

Number 2.4 2.5 2.3 1.4 1.1 1.6 0.9 0.8 0.9Duration 7.3 8.8 6.1 4.4 3.7 4.8 12.7 13.4 12.4Max 32.6 28.5 35.9 -4.2 -4.6 -4.1 36.3 29.5 40.5Min 5.0 3.7 5.9 -20.4 -17.5 -21.9 -21.8 -19.2 -23.5Amplitude 131.6 130.1 132.8 -53.2 -36.9 -61.3 103.5 115.7 96.0

Median Across Episodes

Boom Bust Boom-bust

ALL AE EM ALL AE EM ALL AE EM

Number 2.0 2.0 2.0 1.0 1.0 2.0 1.0 1.0 1.0Duration 6.0 8.0 5.0 4.0 3.0 4.0 12.0 13.0 12.0Max 28.5 26.0 31.0 -3.0 -3.0 -3.0 29.0 27.0 31.0Min 3.0 2.0 4.0 -18.0 -15.0 -19.0 -19.0 -18.0 -20.0Amplitude 105.5 121.0 84.0 -42.0 -30.0 -51.5 80.5 106.0 39.0

Note: Number is number of episodes; Duration is length of episodes in years; Max and Min aremaximum and minimum growth rate of cross-border credit during episode, respectively; Amplitudeis cumulative sum of growth rate of cross-border credit over episode.

Appendix 42

US Broker-Dealers Leverage

1977 1982 1987 1992 1997 2002 20070

5

10

15

20

25

30

35

Trillio

ns (

Co

nsta

nt

20

08

:Q2

US

D)

Cross-Border Credit (left axis) Leverage (right axis)

0

5

10

15

20

25

30

35

Asse

ts/E

qu

ity

Source: US Flow of FundsAppendix 43

Alternative Identification

I Block exogenous VAR (abstracting from constant and time trend)[LEVtxi,t

]=

[F11,i 0F21,i F22,i

] [LEVt−1xi,t−1

]+

[B11,i 0B21,i B22,i

] [eLEV

tex

i,t

]

I Can still achieve identification with Choleski decomposition

I Robustness

• “Clean” leverage of variation due to world GDP

LEVt = F11LEVt−1 + βGDPwt + uLEV

t

xi,t = F21,iLEVt−1 + F22,ixi,t−1 + uxi,t

Appendix 44

Alternative Identification: IRFs to Leverage Shock

Leverage

5 10 15 20 25 30 35 40

0

2

4

6

8

Pe

rce

nt

Cross-border Credit

5 10 15 20 25 30 35 40

0

1

2

3

Consumption

5 10 15 20 25 30 35 40

0

0.1

0.2

0.3

0.4

House Price

5 10 15 20 25 30 35 40

Quarters

0

0.5

1

1.5

Pe

rce

nt

Real Exch. Rate

5 10 15 20 25 30 35 40

Quarters

-1

-0.8

-0.6

-0.4

-0.2

0Current Account

5 10 15 20 25 30 35 40

Quarters

-0.3

-0.2

-0.1

0

Appendix 45

Alternative Identification: Variance Decomposition

Leverage

5 10 15 20 25 30 35 40

0

50

100

Pe

rce

nt

Cross-border Credit

5 10 15 20 25 30 35 40

0

20

40

60Consumption

5 10 15 20 25 30 35 40

0

10

20

30

40

House Price

5 10 15 20 25 30 35 40

Quarters

0

10

20

30

40

50

Pe

rce

nt

Real Exch. Rate

5 10 15 20 25 30 35 40

Quarters

0

10

20

30Current Account

5 10 15 20 25 30 35 40

Quarters

0

10

20

30

Appendix 46

Alternative Identification: Robustness

Leverage

5 10 15 20 25 30 35 40

0

2

4

6

Pe

rce

nt

Cross-border Credit

5 10 15 20 25 30 35 40

0

0.5

1

1.5

2

Consumption

5 10 15 20 25 30 35 40

0

0.1

0.2

0.3

House Price

5 10 15 20 25 30 35 40

Quarters

0

0.2

0.4

0.6

0.8

1

Pe

rce

nt

Real Exch. Rate

5 10 15 20 25 30 35 40

Quarters

-0.8

-0.6

-0.4

-0.2

0

Current Account

5 10 15 20 25 30 35 40

Quarters

-0.2

-0.1

0

Appendix 47

Alternative Identification: Robustness FEVD

Leverage

5 10 15 20 25 30 35 40

0

50

100

150

Pe

rce

nt

Cross-border Credit

5 10 15 20 25 30 35 40

0

10

20

30Consumption

5 10 15 20 25 30 35 40

0

10

20

30

House Price

5 10 15 20 25 30 35 40

Quarters

0

10

20

30

Pe

rce

nt

Real Exch. Rate

5 10 15 20 25 30 35 40

Quarters

0

5

10

15

20Current Account

5 10 15 20 25 30 35 40

Quarters

0

5

10

15

20

Appendix 48

international credit supply shocks

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