Global Liquidity: Availability of Funds for Safe and Risky Assets

37 Pages Posted: 14 Jun 2011

See all articles by Akito Matsumoto

Akito Matsumoto

International Monetary Fund (IMF)

Date Written: June 2011

Abstract

What is global liquidity and how does it affect an economy? The paper addresses that question by looking at liquidity from two different perspectives: global liquidity as availability of funds in safe and risky asset markets. This distinction between safe and risky asset markets is important due to market segmentation, which called for unconventional monetary policy to restore a function of risky asset markets. To analyze the effect of global liquidity, I construct proxy variables and then asses how they affect an emerging economy whose interest rate is affected by a world risk-free rate and a risk premium. Using the data from four major Latin American countries, I find that these two aspects of global liquidity have similar effects on economic performance in emerging market economies except for their effect on inflation.

Keywords: Asset prices, Cross country analysis, Economic models, Emerging markets, External shocks, Financial risk, Investment, Latin America, Liquidity, Risk premium

Suggested Citation

Matsumoto, Akito, Global Liquidity: Availability of Funds for Safe and Risky Assets (June 2011). IMF Working Paper No. 11/136, Available at SSRN: https://ssrn.com/abstract=1864439

Akito Matsumoto (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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