INTERNATIONAL US MONETARY POLICY TRANSMISSION THROUGH NON-US BANKS

The rise of the USD as the main currency for international transactions and investments makes non- us banks hold significant amounts of US dollars. As a result, there is spillover from US monetary policy to these foreign banks. I show that an increase in interest rates in the US dollar increases the overall cost of borrowing for non-us banks. This increase makes banks across the globe lend less and increases the interest rate they charge on loans. Moreover, I provide a stylized model that explains this mechanism where banks have dollar exposure and pass-through these higher costs to their customers.