Global Excess Liquidity and Asset Prices in Emerging Markets: Evidence from the BRICS

Abstract

Since the early 2000s, global liquidity has experienced very strong growth. Emerging Markets (EMs) have accumulated large foreign exchange reserves while developed markets have dramatically eased their monetary policies. Global excess liquidity has resulted in an increase in the size of international capital inflows, especially toward EMs and may significantly impact their financial stability. In this paper, we examine the impact of global excess liquidity on asset prices for the well-known BRICS countries. Using vector autoregressive and error correction frameworks, we estimate the interaction between global excess liquidity, economic activity and asset prices. Despite mixed results for commodity prices, we show that global excess liquidity causes significant increases in equity and bond prices, a real appreciation of exchange rates, a decrease in 10-year sovereign interest rates and a spread compression.