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Global liquidity and exchange market pressure in emerging market economies

Oliver Hossfeld () and Marcus Pramor ()

No 05/2018, Discussion Papers from Deutsche Bundesbank

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.

Keywords: global liquidity; emerging markets; exchange market pressure; search for yield; global financial cycle (search for similar items in EconPapers)
JEL-codes: F31 E51 E58 C23 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac, nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:052018

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