How Does Global Liquidity Affect Mortgage and Business Credit Interest Rates?: Evidence From Emerging Markets

ABSTRACT We show that changes in global liquidity have an influence on bank lending interest rates across emerging market economies. Specifically, global liquidity has a negative effect on mortgage interest rates and on business interest rates with mortgage rates showing a more pronounced response. Country characteristics also play a role. The negative relationship between global liquidity and domestic interest rates is particularly strong in countries with more foreign banks and greater bank concentration as well as in countries with fewer capital controls. Conversely, countries with greater financial and institutional development experience a reduced impact of global liquidity on lending interest rates.