Global Liquidity and Impairment of Local Monetary Policy

62 Pages Posted: 22 Sep 2020

See all articles by José-Luis Peydró

José-Luis Peydró

Imperial College London; Centre for Economic Policy Research (CEPR); Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Salih Fendoglu

Government of the Republic of Turkey - Central Bank of the Republic of Turkey

Eda Gulsen

Research and Monetary Policy Department Central Bank of Turkey; Department of Economics and Business Universitat Pompeu Fabra

Date Written: 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: banks, carry trade, emerging markets, Global financial cycle, monetary policy

JEL Classification: F30, G01, G15, G21, G28

Suggested Citation

Peydro, Jose-Luis and Fendoglu, Salih and Gulsen, Eda, Global Liquidity and Impairment of Local Monetary Policy (November 2019). Available at SSRN: https://ssrn.com/abstract=3696353

Jose-Luis Peydro (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, Barcelona 08005
Spain
(+34) 93 542 1756 (Phone)
(+34) 93 542 1746 (Fax)

HOME PAGE: http://https://sites.google.com/site/joseluispeydroswebpage/

Salih Fendoglu

Government of the Republic of Turkey - Central Bank of the Republic of Turkey

Istiklal Cad. 10 Ulus
06100 Ankara, Ankara 06050
Turkey

Eda Gulsen

Research and Monetary Policy Department Central Bank of Turkey ( email )

Ankara
Turkey

Department of Economics and Business Universitat Pompeu Fabra ( email )

Ramon Trias Fargas, 25-27
Barcelona, E-08005
Spain

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