IDEAS home Printed from https://ideas.repec.org/p/bok/wpaper/1438.html
   My bibliography  Save this paper

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
    as

    Download full text from publisher

    File URL: http://papers.bok.or.kr/RePEc_attach/wpaper/english/wp-2014-38.pdf
    File Function: Working Paper, 2014
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Canova, Fabio, 1991. "The Sources of Financial Crisis: Pre- and Post-Fed Evidence," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(3), pages 689-713, August.
    2. Acharya, Viral V. & Pedersen, Lasse Heje, 2005. "Asset pricing with liquidity risk," Journal of Financial Economics, Elsevier, vol. 77(2), pages 375-410, August.
    3. Christina D. Romer & David H. Romer, 2004. "A New Measure of Monetary Shocks: Derivation and Implications," American Economic Review, American Economic Association, vol. 94(4), pages 1055-1084, September.
    4. Glick, Reuven & Leduc, Sylvain, 2012. "Central bank announcements of asset purchases and the impact on global financial and commodity markets," Journal of International Money and Finance, Elsevier, vol. 31(8), pages 2078-2101.
    5. di Giovanni, Julian & Shambaugh, Jay C., 2008. "The impact of foreign interest rates on the economy: The role of the exchange rate regime," Journal of International Economics, Elsevier, vol. 74(2), pages 341-361, March.
    6. Jordi Galí & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 707-734.
    7. L. Effie Psalida & Tao Sun, 2011. "Does G-4 Liquidity Spill Over?," IMF Working Papers 11/237, International Monetary Fund.
    8. Woon Gyu Choi & David Cook, 2006. "Stock Market Liquidity and the Macroeconomy: Evidence from Japan," NBER Chapters,in: Monetary Policy with Very Low Inflation in the Pacific Rim, NBER-EASE, Volume 15, pages 309-340 National Bureau of Economic Research, Inc.
    9. Kloek, Tuen & van Dijk, Herman K, 1978. "Bayesian Estimates of Equation System Parameters: An Application of Integration by Monte Carlo," Econometrica, Econometric Society, vol. 46(1), pages 1-19, January.
    10. Edwards, Sebastian, 2010. "The international transmission of interest rate shocks: The Federal Reserve and emerging markets in Latin America and Asia," Journal of International Money and Finance, Elsevier, vol. 29(4), pages 685-703, June.
    11. Jörg Breitung & Sandra Eickmeier, 2006. "Dynamic factor models," AStA Advances in Statistical Analysis, Springer;German Statistical Society, vol. 90(1), pages 27-42, March.
    12. Jushan Bai & Serena Ng, 2002. "Determining the Number of Factors in Approximate Factor Models," Econometrica, Econometric Society, vol. 70(1), pages 191-221, January.
    13. John B. Taylor, 2016. "Rethinking the International Monetary System," Cato Journal, Cato Journal, Cato Institute, vol. 36(2), pages 239-250, Spring/Su.
    14. Renée Fry & Adrian Pagan, 2011. "Sign Restrictions in Structural Vector Autoregressions: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 49(4), pages 938-960, December.
    15. Hélène Rey, 2016. "International Channels of Transmission of Monetary Policy and the Mundellian Trilemma," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 64(1), pages 6-35, May.
    16. Sebastian Edwards, 2015. "Monetary Policy Independence under Flexible Exchange Rates: An Illusion?," The World Economy, Wiley Blackwell, vol. 38(5), pages 773-787, May.
    17. Gill Hammond, 2012. "State of the art of inflation targeting," Handbooks, Centre for Central Banking Studies, Bank of England, edition 4, number 29, March.
    18. Rigobon, Roberto & Sack, Brian, 2004. "The impact of monetary policy on asset prices," Journal of Monetary Economics, Elsevier, vol. 51(8), pages 1553-1575, November.
    19. Cerutti, Eugenio & Claessens, Stijn & Ratnovski, Lev, 2014. "Global Liquidity and Drivers of Cross-Border Bank Flows," CEPR Discussion Papers 10314, C.E.P.R. Discussion Papers.
    20. James H. Stock & Mark W. Watson, 2005. "Implications of Dynamic Factor Models for VAR Analysis," NBER Working Papers 11467, National Bureau of Economic Research, Inc.
    21. Bluedorn, John C. & Bowdler, Christopher, 2011. "The open economy consequences of U.S. monetary policy," Journal of International Money and Finance, Elsevier, vol. 30(2), pages 309-336, March.
    22. Goncalves, Carlos Eduardo S. & Salles, Joao M., 2008. "Inflation targeting in emerging economies: What do the data say?," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 312-318, February.
    23. Ciccarelli, Matteo & Maddaloni, Angela & Peydró, José-Luis, 2013. "Heterogeneous transmission mechanism: monetary policy and financial fragility in the euro area," Working Paper Series 1527, European Central Bank.
    24. Michael Ehrmann & Marcel Fratzscher, 2009. "Global Financial Transmission of Monetary Policy Shocks," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 71(6), pages 739-759, December.
    25. Canova, Fabio & Ciccarelli, Matteo, 2013. "Panel Vector Autoregressive Models: A Survey," CEPR Discussion Papers 9380, C.E.P.R. Discussion Papers.
    26. Jorge M. Streb & Gustavo Torrens, 2011. "Meaningful talk," CEMA Working Papers: Serie Documentos de Trabajo. 443, Universidad del CEMA, revised May 2017.
    27. Lutz Kilian, 1998. "Small-Sample Confidence Intervals For Impulse Response Functions," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 218-230, May.
    28. Rose, Andrew K., 2007. "A stable international monetary system emerges: Inflation targeting is Bretton Woods, reversed," Journal of International Money and Finance, Elsevier, vol. 26(5), pages 663-681, September.
    29. Bergin, Paul R., 2006. "How well can the New Open Economy Macroeconomics explain the exchange rate and current account?," Journal of International Money and Finance, Elsevier, vol. 25(5), pages 675-701, August.
    30. Nikolsko-Rzhevskyy, Alex & Papell, David H. & Prodan, Ruxandra, 2014. "Deviations from rules-based policy and their effects," Journal of Economic Dynamics and Control, Elsevier, vol. 49(C), pages 4-17.
    31. Frankel, Jeffrey & Schmukler, Sergio L. & Serven, Luis, 2004. "Global transmission of interest rates: monetary independence and currency regime," Journal of International Money and Finance, Elsevier, vol. 23(5), pages 701-733, September.
    32. James H. Stock & Mark W. Watson, 2003. "Has the Business Cycle Changed and Why?," NBER Chapters,in: NBER Macroeconomics Annual 2002, Volume 17, pages 159-230 National Bureau of Economic Research, Inc.
    33. Markus K. Brunnermeier & Thomas M. Eisenbach & Yuliy Sannikov, 2012. "Macroeconomics with Financial Frictions: A Survey," Levine's Working Paper Archive 786969000000000384, David K. Levine.
    34. Antonello D'Agostino & Paolo Surico, 2009. "Does Global Liquidity Help to Forecast U.S. Inflation?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(2-3), pages 479-489, March.
    35. Rose, Andrew K., 2014. "Surprising similarities: Recent monetary regimes of small economies," Journal of International Money and Finance, Elsevier, vol. 49(PA), pages 5-27.
    36. James H. Stock & Mark W. Watson, 2003. "Has the business cycle changed?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 9-56.
    37. Matteo Ciccarelli & Angela Maddaloni & José-Luis Peydró, 2013. "Heterogeneous transmission mechanism: monetary policy and financial fragility in the eurozone," Economic Policy, CEPR;CES;MSH, vol. 28(75), pages 459-512, July.
    38. John B Taylor, 2013. "International monetary policy coordination: past, present and future," BIS Working Papers 437, Bank for International Settlements.
    39. Christopher A. Sims & Tao Zha, 1999. "Error Bands for Impulse Responses," Econometrica, Econometric Society, vol. 67(5), pages 1113-1156, September.
    40. Bauer, Michael D. & Neely, Christopher J., 2014. "International channels of the Fed's unconventional monetary policy," Journal of International Money and Finance, Elsevier, vol. 44(C), pages 24-46.
    41. Carlos A. Vegh & Guillermo Vuletin, 2013. "Overcoming the Fear of Free Falling: Monetary Policy Graduation in Emerging Markets," World Scientific Book Chapters,in: The Role of Central Banks in Financial Stability How Has It Changed?, chapter 6, pages 105-129 World Scientific Publishing Co. Pte. Ltd..
    42. Taylor, John B., 2013. "International monetary coordination and the great deviation," Journal of Policy Modeling, Elsevier, vol. 35(3), pages 463-472.
    43. Fabio Canova, 2005. "The transmission of US shocks to Latin America," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(2), pages 229-251.
    44. Kadiyala, K Rao & Karlsson, Sune, 1997. "Numerical Methods for Estimation and Inference in Bayesian VAR-Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(2), pages 99-132, March-Apr.
    45. Seung C. Ahn & Alex R. Horenstein, 2013. "Eigenvalue Ratio Test for the Number of Factors," Econometrica, Econometric Society, vol. 81(3), pages 1203-1227, May.
    46. Andrés Fernández & Michael W Klein & Alessandro Rebucci & Martin Schindler & Martín Uribe, 2016. "Capital Control Measures: A New Dataset," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 64(3), pages 548-574, August.
    47. Kim, Soyoung, 2001. "International transmission of U.S. monetary policy shocks: Evidence from VAR's," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 339-372, October.
    48. Eickmeier, Sandra & Gambacorta, Leonardo & Hofmann, Boris, 2014. "Understanding global liquidity," European Economic Review, Elsevier, vol. 68(C), pages 1-18.
    49. Valente, Giorgio, 2009. "International interest rates and US monetary policy announcements: Evidence from Hong Kong and Singapore," Journal of International Money and Finance, Elsevier, vol. 28(6), pages 920-940, October.
    50. Alessandro Rebucci, 2010. "Is growth exogenous? Evidence from the 1970s and 1980s," Applied Economics, Taylor & Francis Journals, vol. 42(5), pages 535-543.
    51. Sally Chen & Philip Liu & Andrea M. Maechler & Chris Marsh & Sergejs Saksonovs & Hyun S Shin, 2012. "Exploring the Dynamics of Global Liquidity," IMF Working Papers 12/246, International Monetary Fund.
    52. Helge Berger & Thomas Harjes, 2009. "Does Global Liquidity Matter for Monetary Policy in the Euro Area?," International Finance, Wiley Blackwell, vol. 12(1), pages 33-55, May.
    53. Ioan Carabenciov & Charles Freedman & Roberto Garcia-Saltos & Douglas Laxton & Ondra Kamenik & Petar Manchev, 2013. "GPM6; The Global Projection Model with 6 Regions," IMF Working Papers 13/87, International Monetary Fund.
    54. Kim, Soyoung & Yang, Doo Yong, 2009. "International Monetary Transmission and Exchange Rate Regimes: Floaters vs. Non-Floaters," ADBI Working Papers 181, Asian Development Bank Institute.
    55. Luc Laeven & Fabián Valencia, 2013. "Systemic Banking Crises Database," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 61(2), pages 225-270, June.
    56. Il Houng Lee & Woon Gyu Choi, 2010. "Monetary Transmission of Global Imbalances in Asian Countries," IMF Working Papers 10/214, International Monetary Fund.
    57. Brito, Ricardo D. & Bystedt, Brianne, 2010. "Inflation targeting in emerging economies: Panel evidence," Journal of Development Economics, Elsevier, vol. 91(2), pages 198-210, March.
    58. Sebastian Edwards, 2015. "Monetary Policy Independence under Flexible Exchange Rates: An Illusion?," NBER Working Papers 20893, National Bureau of Economic Research, Inc.
    59. Wongswan, Jon, 2009. "The response of global equity indexes to U.S. monetary policy announcements," Journal of International Money and Finance, Elsevier, vol. 28(2), pages 344-365, March.
    60. Ben S. Bernanke & Jean Boivin & Piotr Eliasz, 2005. "Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 120(1), pages 387-422.
    61. Reginald Darius, 2010. "Can Global Liquidity Forecast Asset Prices?," IMF Working Papers 10/196, International Monetary Fund.
    62. Andrés Fernández & Michael W Klein & Alessandro Rebucci & Martin Schindler & Martín Uribe, 2016. "Capital Control Measures: A New Dataset," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 64(3), pages 548-574, August.
    63. Eugenio M Cerutti & Stijn Claessens & Damien Puy, 2015. "Push Factors and Capital Flows to Emerging Markets; Why Knowing Your Lender Matters More Than Fundamentals," IMF Working Papers 15/127, International Monetary Fund.
    64. John Ammer & Clara Vega & Jon Wongswan, 2010. "International Transmission of U.S. Monetary Policy Shocks: Evidence from Stock Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 179-198, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hyunju Kang & Bok-Keun Yu & Jongmin Yu, 2016. "Global Liquidity and Commodity Prices," Review of International Economics, Wiley Blackwell, vol. 24(1), pages 20-36, February.
    2. Jinsoo Lee & Bok-Keun Yu, 2018. "What Drives the Stock Market Comovements between Korea and China, Japan and the US?," Working Papers 2018-2, Economic Research Institute, Bank of Korea.
    3. Nathan Converse & Eduardo Levy-Yeyati & Tomas Williams, 2018. "How ETFs Amplify the Global Financial Cycle in Emerging Markets," DOUMENTOS DE TRABAJO LACEA 016200, THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION - LACEA.

    More about this item

    Keywords

    Global liquidity; Policy responses; Panel Factor-Augmented VAR;

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bok:wpaper:1438. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Economic Research Institute). General contact details of provider: http://edirc.repec.org/data/imbokkr.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.