Global dollar credit: links to US monetary policy and leverage

Working Papers No 483
January 2015

Also published in "US monetary policy, leverage and offshore dollar credit", Economic Policy, vol 30, no 82, April 2015, pp 187-229 and [abridged Chinese version] in Chinamoney, November 2015, pp 58-62.

Since the global financial crisis, banks and bond investors have increased the outstanding US dollar credit to non-bank borrowers outside the United States from $6 trillion to $9 trillion. This increase has implications for understanding global liquidity and monetary policy transmission. We analyse the links between US monetary policy, leverage and flows into bond funds, on the one hand, and dollar credit extended to non-US borrowers, on the other. Prior to the crisis, global banks drew on low US dollar funding rates and easy leveraging to extend dollar credit to non-US borrowers. After the Federal Reserve announced its large-scale bond purchases in 2008, however, investors responded to compressed long-term US Treasury rates by buying higher yielding dollar bonds from non-US issuers. Thus, US unconventional monetary policy contributed to shifting the balance of dollar credit transmission from global banks to global bond investors.

JEL classification: E43, E51, F34, G21, G23

Keywords: US dollar, offshore credit, interest rate differentials, leverage, bond fund flows, policy rates, term premium, unconventional monetary policy