Global liquidity spillovers in the Asia–Pacific region: policy-driven versus market-driven effects

Chau Le (), Huyen Nguyen () and Duc Vo ()
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Chau Le: University of Lincoln
Huyen Nguyen: Ho Chi Minh University of Banking
Duc Vo: The University of Western Australia

Empirical Economics, 2024, vol. 67, issue 3, No 8, 1113 pages

Abstract: Abstract This research investigates the spillovers of global liquidity to Asia–Pacific countries, focusing on the contradictory effects of policy-driven liquidity created by monetary stances in advanced economies and market-driven liquidity generated by the private banking sector. Our findings stand in sharp contrast to previous studies, showing that shifts in macro-financial indicators in Asia–Pacific economies are predominantly influenced by market-driven shocks rather than those of policy-driven liquidity. Specifically, liquidity shocks associated with surges in cross-border credit flows, especially those denominated in US dollars, drive up asset prices and have boosting effects on inflation and economic output. A positive shock to market liquidity also results in an appreciation pressure on domestic currencies and a short-term rise in interest rates. However, excess liquidity shocks caused by the Bank of Japan’s adjustments in shadow short rates and balance sheets have a negative effect on inflation and bring about temporary depreciation pressure on Asian currencies. Surprisingly, we find that Asian responses to financial easing associated with the Fed’s monetary policy change are not well-pronounced.

Keywords: Global liquidity; Spillover effect; Monetary policy; Transmission mechanism; Asia–Pacific region (search for similar items in EconPapers)
JEL-codes: E52 E58 F3 F6 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s00181-024-02573-4

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