Global liquidity and impairment of local monetary policy

Fendoğlu, Salih; Gülsen, Eda; Peydró, José-Luis

Global liquidity and impairment of local monetary policy

Citation

Fendoğlu, S, Gülsen, E, Peydró, J. Global liquidity and impairment of local monetary policy. 2019. handle: http://hdl.handle.net/10230/43776

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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.