The international transmission of monetary policy through financial centres: Evidence from the United Kingdom and Hong Kong

Abstract

This paper explores the cross-border transmission of monetary policy by comparing and contrasting the results for two major international financial centres: Hong Kong and the United Kingdom. We examine the effect of monetary policy in the USA, euro area and Japan, on banks’ domestic lending behaviour. Using individual bank-level data we find that financial connections – in the form of lending to and borrowing from the country which changes monetary policy - play an important role in the transmission of foreign monetary policy. We are able to establish evidence for both a bank funding and bank portfolio channel of monetary policy, for both Hong Kong and the UK. These results contrast to the largely inconclusive results from previous studies, whose aggregate nature may have masked offsetting individual bank effects.