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.