Global excess liquidity spillovers and monetary policy in emerging economies

The following paper raises the question of monetary policy’s effectiveness in emerging countries during the three phases of global excess liquidity. To answer it, our analysis is divided in two parts. The first one focuses on the concept of global excess liquidity and identifies when it occurs according to global liquidity cycles. The second one is devoted to a country case study based on Time-Varying Parameter Vector Autoregression (TVP-VAR) models. It focuses on the effectiveness of monetary policy in six emerging countries – each of which has different characteristics during the identified episodes of global excess liquidity. This paper’s contribution lies in the identification of episodes of global excess liquidity. It confirms the fact that their specificities are in line with the main features of the three phases of global liquidity acknowledged in the literature. Additionally, the empirical methodology allows us to establish a hierarchy among the considered countries, depending on global excess liquidity pass-through in their economies. Results reveal that receiving countries tend to react differently to surges in global liquidity conditions, particularly during periods of global excess liquidity. Moreover, results confirm the literature's typology regarding vulnerabilities of emerging economies. Thence, these vulnerabilities may affect the efficiency of countries’ monetary policies. Besides, it appears that the emerging economies examined in this paper are generally affected by global liquidity’s private components at different degrees. Furthermore, it is found that countries following the inflation targeting framework can limit liquidity inflows’ consequences on domestic prices. Finally, it seems that the choice of monetary policy (pegged currency, active reserve management and capital controls) implemented by the People's Bank of China helps to isolate the country from global liquidity developments.