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Global liquidity and exchange market pressure in emerging market economies

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  • Hossfeld, Oliver
  • Pramor, Marcus

Abstract

We analyse the relationship between global liquidity and exchange market pressure in 32 emerging market economies. Exchange market pressure is a measure of excess currency demand that is applicable across different exchange rate regimes as it accounts for changes in exchange rates, foreign exchange reserves and, optionally, interest rates. Surges in monetary liquidity, credit provision, and short-term funding in advanced economies are shown to be robustly associated with appreciation pressure on emerging market currencies. The underlying transmission mechanism, however, only operates under regular financial market conditions: ample liquidity provision in advanced economies contributes to the build-up of financial stability risks in emerging market economies in tranquil times, but further liquidity injections do not avert the pronounced depreciation pressure on emerging market currencies in times of high market volatility.

Suggested Citation

  • Hossfeld, Oliver & Pramor, Marcus, 2018. "Global liquidity and exchange market pressure in emerging market economies," Discussion Papers 05/2018, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdps:052018
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    Cited by:

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    2. Ahmed, Rashad, 2020. "Global Flight-to-Safety Shocks," MPRA Paper 103501, University Library of Munich, Germany.
    3. Senanu Kwasi Klutse & Judit Sági & Gábor Dávid Kiss, 2022. "Exchange Rate Crisis among Inflation Targeting Countries in Sub-Saharan Africa," Risks, MDPI, vol. 10(5), pages 1-13, May.
    4. Ahmed, Rashad, 2023. "Flights-to-safety and macroeconomic adjustment in emerging markets: The role of U.S. monetary policy," Journal of International Money and Finance, Elsevier, vol. 133(C).
    5. Muhammad Aftab & Abid Ali & Scott W. Hegerty, 2021. "Foreign exchange market pressure and stock market dynamics in emerging Asia," International Economics and Economic Policy, Springer, vol. 18(4), pages 699-719, October.

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    More about this item

    Keywords

    global liquidity; emerging markets; exchange market pressure; search for yield; global financial cycle;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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