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Paper #1680

Title:
Global liquidity and impairment of local monetary policy
Authors:
Salih Fendoğlu, Eda Gülşen and José-Luis Peydró
Date:
November 2019
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.
Keywords:
Global financial cycle; monetary policy; emerging markets; banks; carry trade
JEL codes:
G01; G15; G21; G28; F30
Area of Research:
Macroeconomics and International Economics

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