DP15273 Global Liquidity and Impairment of Local Monetary Policy

Author(s): Salih Fendoglu, Eda Gulsen, José Luis Peydró
Publication Date: September 2020
Keyword(s): banks, carry trade, emerging markets, Global financial cycle, monetary policy
JEL(s): F30, G01, G15, G21, G28
Programme Areas: International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15273

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.