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

Author

Listed:
  • Woon Gyu Choi

    (Economic Research Institute, The Bank of Korea)

  • Taesu Kang

    (International Economics Team, Economic Research Institute, The Bank of Korea)

  • Geun-Young Kim

    (International Economics Team, Economic Research Institute, The Bank of Korea)

  • Byongju Lee

    (International Economics Team, Economic Research Institute, The Bank of Korea)

Abstract

This paper analyzes the transmission of global liquidity from advanced economies to EMEs. We distill global liquidity (GL) momenta from the macro-financial data of advanced economies through a factor model. Using a panel factor-augmented VAR analysis, we then delve into EMEs' responses to shocks to each of three types of global liquidity momenta-policy-driven liquidity, market-driven liquidity, and risk averseness. Each GL shock significantly affects EMEs on the real and external fronts. Counterfactual analyses suggest that policy rates are effective in stabilizing the real front, whereas appropriate adjustments in foreign reserves could be conducive to stabilizing the external front.

Suggested Citation

  • Woon Gyu Choi & Taesu Kang & Geun-Young Kim & Byongju Lee, 2014. "Global Liquidity Transmission to Emerging Market Economies, and Their Policy Responses," Working Papers 2014-38, Economic Research Institute, Bank of Korea.
    • Handle: RePEc:bok:wpaper:1438
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    Keywords

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    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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