Global excess liquidity and asset prices in emerging countries: A PVAR approach

Abstract

The overly accommodating monetary policy is often accused of creating surplus liquidity and bubbles on the asset markets. In particular, it could have contributed to strong capital inflows in emerging countries, which may have had a significant impact on financial stability in these countries, affecting domestic financing conditions and creating a risk of upward pressures on asset prices. We focus in this paper on the impact of global excess liquidity on goods and asset prices for a set of emerging market countries by estimating a panel VAR model. We define first global liquidity and highlight situations of excess liquidity. We then find that excess liquidity at global level has spillover effects on output and price levels in emerging countries. The impact on real estate, commodity and share prices in emerging countries is less clear.