DP11839-2 | International Spillovers and Local Credit Cycles

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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 rm 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 rm-bank level { rms pay a lower interest rate when borrowing in foreign currency from their domestic banks; (2) the UIP risk premium, both at the rm-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 ows into Turkey, lowering domestic borrowing costs and leads to an expansion of credit for domestic rms; and (4) rm-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, rms 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.