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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