US monetary policy and global financial stability

Using a panel of 257 banks across 26 countries, this paper documents the influence of US monetary policy on risk-taking attitudes of banks around the world. It finds that an easing of US monetary policy increases banks' default risk. It further finds that the impact of US monetary policy is channelled through capital flows, rendering a financial system with capital controls less susceptible to US monetary policy's influence than a system that welcomes capital mobility. The results echo the endorsement by IMF of capital controls as a valid tool for domestic macroeconomic management. They also support the preemptive application of contractionary monetary policy on US's part to curb global credit bubbles in advance.