Global Liquidity and the Impairment of Local Monetary Policy Transmission
| Title: |
Global Liquidity and the Impairment of Local Monetary Policy Transmission |
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Number: |
19/13 |
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Author(s): |
Salih Fendoğlu, Eda Gülşen, Josè-Luis Peydro |
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Language: |
English |
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Date: |
May 2019 |
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Abstract: |
We show that global liquidity limits the transmission of local monetary policy on credit markets. For identification, we exploit global liquidity shocks in conjunction with monetary policy changes and exhaustive loan-level data (the credit and international interbank market registers) from a large emerging market, Turkey. We show that softer global liquidity conditions —proxied by lower VIX or expansionary US monetary policy— attenuate the pass-through of local monetary policy tightening on loan rates, especially for banks that borrow ex-ante more from international wholesale markets. Effects are also important for other credit margins and for bank risk-taking —especially for risky borrowers in FX loans. The mechanism at work is via a bank carry trade from international markets when local monetary conditions tighten. |
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Keywords: |
Global liquidity, Global financial cycle, Monetary policy transmission, Emerging markets, Banks |
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JEL Codes: |
E52; F30; G01; G15; G21 |
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