International Fiscal-Financial Spillovers:the Effect of Fiscal Shocks on Cross-Border Bank Lending

Sangyup Choi, Davide Furceri, Chansik Yoon

Research output: Contribution to journalArticlepeer-review


This paper sheds new light on the degree of international fiscal-financial spillovers by investigating the effect of domestic fiscal policies on cross-border bank lending. By estimating the dynamic response of U.S. cross-border bank lending towards 45 recipient countries to exogenous domestic fiscal shocks (both measured by spending and revenue) between 1990Q1 and 2012Q4, we find that expansionary domestic fiscal shocks lead to a statistically significant increase in cross-border bank lending and the size of the effect is comparable to an exogenous decline in the federal funds rate by about 25 bp (50 bp) for spending (revenue) shocks. The fiscal-financial spillovers we find are independent of changes in monetary policy or financial conditions measured by the VIX. The effects also depend on the sign of the fiscal shocks and the underlying economic conditions of a source country. While capital controls seem to play some moderating role, we do not find systematic and statistically significant differences in the spillover effects across recipient countries, depending on their exchange rate regime. The extension of the analysis to fiscal shocks for a panel of 16 small open economies largely confirms the U.S. economy’s findings.

Original languageEnglish
Pages (from-to)259-290
Number of pages32
JournalOpen Economies Review
Issue number2
Publication statusPublished - 2021 Apr

Bibliographical note

Funding Information:
Comments from the editor George Tavlas and two anonymous referees helped to greatly improve this paper. We are also thankful to Jaebin Ahn, Şebnem Kalemli-Özcan, Jinil Kim, Soyoung Kim, Jong-Wha Lee, Nicola Pavoni, Matthew Shapiro, Kwanho Shin, and the seminar participants at Korean Macroeconomics Research Group, Korea University, the Bank of Korea, and the 3rd IEFS-EAER Conference in Seoul. The views expressed are those of the authors and do not necessarily represent those of the IMF or its policy. This work was supported (in part) by the Yonsei University Future-leading Research Initiative of 2019 (2019-22-0218). Suhaib Kebhaj, Junhyeok Shin, and Seung Yong Yoo provided excellent research assistance. Any remaining errors are the authors’ sole responsibility.

Publisher Copyright:
© 2021, Springer Science+Business Media, LLC, part of Springer Nature.

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics


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