Discussion Paper Details

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Title: Global Liquidity and Impairment of Local Monetary Policy

Author(s): Salih Fendoglu, Eda Gulsen and José Luis Peydró

Publication Date: September 2020

Keyword(s): banks, carry trade, emerging markets, Global financial cycle and monetary policy

Programme Area(s): International Macroeconomics and Finance

Abstract: We show that global liquidity limits the effectiveness of local monetary policy on credit markets. The mechanism is via a bank carry trade in international markets when local monetary policy tightens. For identification, we exploit global (VIX, U.S. monetary policy) shocks and loan-level data -the credit and international interbank registers- from a large emerging market, Turkey. Softer global liquidity conditions attenuate the pass-through of local monetary policy tightening on loan rates, especially for banks with more access to international wholesale markets. Effects are also important for other credit margins and for risk-taking, e.g. riskier borrowers in FX loans or defaults.

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Bibliographic Reference

Fendoglu, S, Gulsen, E and Peydró, J. 2020. 'Global Liquidity and Impairment of Local Monetary Policy'. London, Centre for Economic Policy Research.