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Global Liquidity Transmission to Emerging Market Economies, and Their Policy Responses

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  • Woon Gyu Choi
  • Taesu Kang
  • Geun-Young Kim
  • Byongju Lee

Abstract

This paper distills and identifies global liquidity (GL) momenta from the macro-financial data of advanced economies through a factor model with sign restrictions as policy-driven, market-driven, and risk averseness factors. Using a panel factor-augmented VAR, we investigate responses of emerging market economies (EMEs) to GL shocks. A policy-driven liquidity increase boosts growth in EMEs, elevating stock prices and currency values, while a risk averseness rise has an opposite effect. A market-driven GL expansion boosts stock markets and lowers funding costs, promoting competitiveness and current account. Inflation targeting EMEs fare better than EMEs under alternative regimes with respect to macrofinancial volatility.

Suggested Citation

  • Woon Gyu Choi & Taesu Kang & Geun-Young Kim & Byongju Lee, 2017. "Global Liquidity Transmission to Emerging Market Economies, and Their Policy Responses," IMF Working Papers 2017/222, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2017/222
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    More about this item

    Keywords

    WP; inflation targeting; GL shock; GL momenta; GL factor; GL expansion; GL metrics; Global Liquidity; Panel Factor-Augmented VAR; GL impact; Liquidity; International liquidity; Central bank policy rate; Asset prices; International reserves; Global;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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