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Does G-4 Liquidity Spill Over?

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  • L. Effie Psalida
  • Tao Sun
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    Abstract

    The resumption of strong capital flows into emerging markets in mid-2009 brought back the debate over whether pull or push factors are the main determinants. This paper, using panel specifications with alternative measures of global liquidity, asks the question whether G-4 liquidity expansion spills over to the rest of the world. The paper finds strong positive links between G-4 liquidity expansion and asset prices, such as equities, in the liquidity receiving economies, which indicates that the push factor plays an important role in asset prices. Liquidity also has a strong positive link with the accumulation of official reserves and with equity portfolio inflows in receiving economies. Moreover, the association between excess equity returns, excess credit growth, and global liquidity has implications for rising risks to financial stability in the receiving economies.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/237.

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    Length: 20
    Date of creation: 01 Oct 2011
    Date of revision:
    Handle: RePEc:imf:imfwpa:11/237

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    Related research

    Keywords: Capital flows; Exchange rates; Capital inflows; Emerging markets; Exchange rate regimes; Spillovers;

    This paper has been announced in the following NEP Reports:

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    1. Giovanni Dell'Ariccia & Paolo Mauro & André Faria & Jonathan David Ostry & Julian di Giovanni & Martin Schindler & M. Ayhan Kose & Marco Terrones, 2008. "Reaping the Benefits of Financial Globalization," IMF Occasional Papers 264, International Monetary Fund.
    2. Matteo Ciccarelli & Benoît Mojon, 2007. "Global Inflation," Kiel Working Papers 1337, Kiel Institute for the World Economy.
    3. M. Ayhan Kose & Eswar Prasad & Kenneth S. Rogoff & Shang-Jin Wei, 2006. "Financial Globalization: A Reappraisal," NBER Working Papers 12484, National Bureau of Economic Research, Inc.
    4. Belke, Ansgar & Orth, Walter & Setzer, Ralph, 2010. "Liquidity and the dynamic pattern of asset price adjustment: A global view," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1933-1945, August.
    5. D'Agostino, A & Surico, P, 2007. "Does global liquidity help to forecast US inflation?," MPRA Paper 6283, University Library of Munich, Germany.
    6. Klaas Baks & Charles Frederick Kramer, 1999. "Global Liquidity and Asset Prices: Measurement, Implications, and Spillovers," IMF Working Papers 99/168, International Monetary Fund.
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