Global Liquidity and Impairment of Local Monetary Policy

• Authors: José-Luis Peydró.
• BSE Working Paper: 110604 | December 19
• Keywords: monetary policy , emerging markets , banks , global financial cycle , carry trade
• JEL codes: G01, G15, G21, G28, F30
• monetary policy
• emerging markets
• banks
• global financial cycle
• carry trade

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.