Global Liquidity and Impairment of Local Monetary Policy
62 Pages Posted: 22 Sep 2020
Date Written: November 2019
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
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