Global Liquidity Transmission to Emerging Market Economies, and Their Policy Responses

32 Pages Posted: 1 Dec 2017

See all articles by Woon Gyu Choi

Woon Gyu Choi

International Monetary Fund (IMF)

Taesu Kang

The Bank of Korea

Geun-Young Kim

Research Dept., Bank of Korea

Byongju Lee

The Bank of Korea; Bank of Korea - Economic Research Institute

Multiple version iconThere are 2 versions of this paper

Date Written: October 2017

Abstract

This paper distills and identifies global liquidity (GL) momenta from the macro-financial data of advanced economies through a factor model with sign restrictions as policy-driven, market-driven, and risk averseness factors. Using a panel factor-augmented VAR, we investigate responses of emerging market economies (EMEs) to GL shocks. A policy-driven liquidity increase boosts growth in EMEs, elevating stock prices and currency values, while a risk averseness rise has an opposite effect. A market-driven GL expansion boosts stock markets and lowers funding costs, promoting competitiveness and current account. Inflation targeting EMEs fare better than EMEs under alternative regimes with respect to macro-financial volatility.

Keywords: Global liquidity, Inflation targeting, Panel Factor-Augmented VAR, International Policy Coordination and Transmission

JEL Classification: F32, F42

Suggested Citation

Choi, Woon Gyu and Kang, Taesu and Kim, Geun-Young and Lee, Byongju, Global Liquidity Transmission to Emerging Market Economies, and Their Policy Responses (October 2017). IMF Working Paper No. 17/222, Available at SSRN: https://ssrn.com/abstract=3079546

Woon Gyu Choi (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Taesu Kang

The Bank of Korea ( email )

39, Namdaemun-ro, Jung-gu
Seoul, 04531
Korea, Republic of (South Korea)

Geun-Young Kim

Research Dept., Bank of Korea ( email )

39, Namdaemun-ro, Jung-gu
Seoul, 04531
Korea, Republic of (South Korea)

Byongju Lee

The Bank of Korea ( email )

39, Namdaemun-ro, Jung-gu
Seoul, 04531
Korea, Republic of (South Korea)

Bank of Korea - Economic Research Institute ( email )

110, 3-Ga, Namdaemunno, Jung-Gu
Seoul 100-794
Korea, Republic of (South Korea)

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