Discussion paper

DP15273 Global Liquidity and Impairment of Local Monetary Policy

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.


Peydro, J, S Fendoglu and E Gulsen (2020), ‘DP15273 Global Liquidity and Impairment of Local Monetary Policy‘, CEPR Discussion Paper No. 15273. CEPR Press, Paris & London. https://cepr.org/publications/dp15273