(plausibly) exogenous variation offered by the aged dependency ratio. Increases in this ratio are associated with reduced saving, as domestic agents draw down on the stock of national saving. Since local banks typically have access to only the domestic deposit base, the interest rates they charge will rise, which in turn reduces the demand for their loans as firms substitute toward foreign lenders with lower interest rates on offer. In equilibrium, the observed domestic lending rate will, _mutatis mutandis_ , increase in tandem with the dependency ratio.

There are two additional empirical issues that we need to consider in our estimation of (8). First, what does a national-level interest rate mean in the context of multiple distinct foreign banks? Arguably, interest rates should be bank- and borrower-specific, but this is precluded by the aggregate nature of the data. Fortunately, even if our measure of interest rates does turn out to be noisy, one of the advantages of IV estimates is that, conditional on a reliable instrument, the approach corrects for measurement error in the instrumented variable. We accordingly proceed with the use of the quarterly average national lending rate as a measure of our domestic lending rate.

A second issue concerns the inclusion (or not) of our original measure of demand conditions, _D_ . In theory, these two demand forces are distinct, and should both be included in (8). However, since our proxy measure of loan demand in high-income countries may also contain a component of developing-country loan demand,<sup>19</sup> we limit any conflation between the two by specifying (8) with only the interest rate variable.

The estimation results are reported in Table 4. In column ( _I1_ ), we replicate the fixed-effects model in ( _B2_ ), but replace loan demand with the lending rate. The coefficient on the interest rate is positive (as expected _a priori_ ), but statistically indistinguishable from zero; this is also the case for the IV specifications that follow. The coefficients on the three channels are also the same as before (negative), but again are statistically insignificant. Due to the endogeneity problems inherent in the estimate, however, we regard these results are merely illustrative, and proceed to a discussion of the IV estimates.

Columns ( _I2_ )–( _I4_ ) report IV estimates that correspond to the benchmark specifications ( _B2_ )–( _B4_ ). The instruments satisfy the relevance condition—Kleibergen-Papp LM tests are statistically significant—and the (insignificant) Hansen _J_ statistic indicates that the instruments are valid. While _F_ statistics (not reported) imply that the first-stage fit is reasonable, the corresponding Kleibergen-Papp F statistics are relatively low ( _F ∈_ [4 _._ 41 _,_ 4 _._ 94], equivalent StockYogo critical values place this range at around 25 percent relative bias), which suggests that the specifications could be weakly identified. We recognize this possible weak instrument problem, and, consequently, our interpretation of the results here proceed with greater caution.

While the results are largely similar to those in Table 1, the asset volatility channel does not appear to be operative any longer in any of our specifications. We conjecture that the inclusion of the interest rate could dilute the impact of the asset volatility channel, since interest rates

> 19The question on changes in demand conditions posed in Senior Loan Officer Survey does not distinguish between borrower nationality. While cross-border exposures of U.S. banks are mainly to high-income countries, the response may nevertheless incorporate some consideration of demand conditions in developing countries.

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