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Global Liquidity and the Impact on SEACEN Economies

Peter Tillmann

in Research Studies from South East Asian Central Banks (SEACEN) Research and Training Centre

Abstract: Strong fluctuations in global liquidity have emerged as a consequence of shifts in monetary policy in advanced economies, swings in global risk aversion and the extension of cross-border credit. From the perspective of SEACEN economies, the ups and downs in global liquidity pose a challenge to monetary, fiscal, regulatory and macroprudential policies: • Sudden increases of global liquidity lead to a domestic boom in economic activity, a surge in asset prices and an appreciation of the exchange rate against the US dollar. • Spillovers through global liquidity are not constant over time. They can turn out to be strong or weak depending on global financial conditions, the domestic macroeconomic environment and the policy responses taken. Likewise, the channels through which global liquidity affects emerging markets vary over time in their importance. • The policy responses taken in SEACEN member economies are diverse. This reflects the fact that the effects of global liquidity, while broadly similar with regard to the core macroeconomic variables, gives rise to wide range of countryspecific challenges. Policymakers are concerned about overheating property markets, an overly leveraged financial system, foreign currency borrowing, among many other facets of global liquidity, and should design policies directed towards these specific challenges. • In this environment, searching for a “one-size-fits-all” policy response is misleading. While it is generally acknowledged that healthy macroeconomic fundamentals reduce the exposure to swings in global liquidity, the specific policies directed towards maintaining financial stability will likely to be diverse.

Date: 2017
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