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Global liquidity transmission to emerging market economies, and their policy responses

Woon Gyu Choi, Taesu Kang, Geun-Young Kim and Byongju Lee

Journal of International Economics, 2017, vol. 109, issue C, 153-166

Abstract: This paper analyzes the transmission of global liquidity (GL) from advanced economies (AEs) to emerging market economies (EMEs). We distill GL momenta from the macro-financial data of AEs through a factor model and identify them with sign restrictions as policy-driven, market-driven, and risk averseness factors. Using a panel factor-augmented VAR analysis, we then investigate EME responses to shocks to GL momenta. A positive shock to policy-driven liquidity boosts growth in EMEs, elevating stock prices and currency values, while a shock to risk averseness has a largely opposite effect. A market-driven GL expansion boosts stock markets and lowers funding costs, increasing competitiveness and current account balance. Inflation targeting EMEs are found to fare better than EMEs under alternative regimes in terms of macro-financial volatility.

Keywords: Global liquidity; Emerging market economies; Panel factor-augmented VAR; Inflation targeting (search for similar items in EconPapers)
JEL-codes: F32 F42 (search for similar items in EconPapers)
Date: 2017
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Working Paper: Global Liquidity Transmission to Emerging Market Economies, and Their Policy Responses (2017) Downloads
Working Paper: Global Liquidity Transmission to Emerging Market Economies, and Their Policy Responses (2014) Downloads
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DOI: 10.1016/j.jinteco.2017.08.001

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