Global Liquidity Research Articles

Sovereign ESG and Foreign Direct Investment in the GCC: The Amplifying Role of Trade Openness in Economic Diversification

This study examines the relationship between Sovereign Environmental, Social, and Governance (SESG) initiatives and foreign direct investment (FDI) within the context of the Gulf Cooperation Council (GCC) countries from 2000 to 2022. The research explores how national ESG performance influences the attractiveness of these countries to foreign investors, with a particular focus on the moderating role of trade openness. Using a comprehensive panel data analysis, the study finds that strong SESG frameworks are positively correlated with higher FDI inflows, with trade openness amplifying the positive impact of SESG. Additionally, the use of Instrumental Variables (IV) estimation addresses endogeneity concerns, further confirming the robustness of the results. Moreover, the analysis reveals that trade openness amplifies the positive impact of SESG on FDI, suggesting that GCC countries with liberal trade policies and robust ESG practices are more successful in attracting sustainable and responsible investments. These findings contribute to the growing body of literature on ESG and FDI, offering valuable insights for policymakers seeking to enhance economic growth through strategic investments in sustainability and governance. The findings offer valuable insights for policymakers in aligning SESG frameworks with global ESG standards and leveraging global liquidity conditions to enhance FDI inflows, particularly in light of ongoing economic diversification efforts in the GCC.

Non-linear dynamics of global liquidity and energy sector profitability

ABSTRACT This study examines how global liquidity influences the profitability of companies in the energy sector using a non-linear approach. Applying Functional Principal Component Analysis (FPCA) to sparse data, we reconstruct the profitability history of 497 energy companies in various subsectors, including coal, oil and gas, oil and gas-related equipment and services, renewable energy, and uranium. We use a Distributed Delay Nonlinear Model (DLNM) to estimate the impact of global liquidity on profitability. Our results reveal distinct nonlinear patterns in the response of these subsectors to changes in global liquidity. For example, in the oil and gas subsector, an extreme quantile (99%) of global liquidity is associated with a significant 5.19% increase in profitability in the first quarter after the shock. In contrast, in the renewable energy subsector, a lower quantile (25%), corresponding to a moderately downward trend, is associated with a 0.73% increase in profitability over the same period. These finings are crucial to improving risk management, investment and policy development strategies within the energy sector, offering a deeper understanding of the dynamics in the global financial and economic landscape.

Анализ международных финансовых отношений через призму финансовых механизмов

The consistent isolation of Russia from the global monetary and financial system and its inherent financial mechanisms determines the need to study the possibility and feasibility of their use in the existing geopolitical conditions. The purpose of the study is to determine the nature of the relationship between the main international financial mechanisms and the consequences of external influence on them with the use of sanctions. A new approach was used, in which the analysis of processes in the modern global monetary and financial system was carried out through the prism of the main international financial mechanisms. This approach not only provides another perspective on their consideration, but also allows us to identify new aspects of their relationships and mutual influence. During the research, methods of comparative logical and contextual analysis, systematization, classification and generalization were used. Based on a synthesis of the theory of financial mechanisms and the concept of global liquidity, the relationship of key international financial mechanisms, as well as the role of international reserves, is shown. As a result of the study, it was concluded that it is impossible for Russia to use existing international financial mechanisms controlled by the United States under sanctions and the need to create new regional digital financial mechanisms with the participation of the EAEU countries and the BRICS states.

Sustainability of lending diversification of sub-Saharan African low-income countries

The momentum in sub-Saharan low-income countries is leading to diversifying their funding sources to cover large infrastructure expenditures. This situation meets the expectations of international investors who are still willing to explore new opportunities. Recent access to the Eurobond market by these new players has resulted in the growing substitution of traditional concessional loans by market ones in countries with low-debt portfolios. Thus, a new sustainability approach is required to include risk premiums and potentially versatile investor behaviors. First, we use a theoretical model to show that in a context of low international interest rates, debtor countries can continue to stabilize their level of debt either through budget deficit, if it remains below a given sustainability threshold, or through budget surplus in a downturn context (high-interest rates and spreads). Second, the versatile behavior of investors could be challenging. Third, global liquidity greatly influences the debt dynamics of SSA countries so it matters more for bond spreads than domestic factors. As our empirical study shows that the current debt situation of sub-Saharan African low-income countries increasingly involved in the Eurobond market remains under control. To avoid the worst-case scenario, strong institutions should be a priority, along with appropriate management tools and methods of debt monitoring to cope with all potential vulnerability caused by undesirable side effects of such unstable behaviors.

Network structure, dynamic evolution and block characteristics of sovereign debt risk: The global evidence

Global sovereign debt risks are escalating with the tightening of global liquidity. We apply the LASSO-VAR spillover model, network approach and block model to analyze the overall situation and time-varying characteristics of sovereign risk volatility spillover effects among 50 countries. The results show that there is a discernible cyclical pattern in the spillover effect of global sovereign risk volatility, with the spillover intensity progressively rising in each cycle, and more countries have emerged as "net risk exporters" recently. Countries and regions exhibit diverse risk spillover traits, and assume varying roles in the transmission of sovereign debt risks. The originator of a sovereign risk shock isn't necessarily its primary disseminator, underscoring the need to account for systemic significance and risk infectivity. The interlinkages among sovereign debt risk spillover blocks vary over time, given that the composition and attributes of these blocks change. Our findings provide implications for related regulators and investors.

Does a country’s sovereign credit rating drive capital inflows into emerging European markets? Evidence from Balkan region

This study investigates the impact of sovereign credit ratings on capital inflows and their composition for emerging European economies in the Balkan region. This study sheds light on this nexus by selecting Bulgaria, Croatia, Greece, Romania, and Slovenia between 2006-2018 using panel data analysis. The estimation results underscore that a sovereign credit rating is a significant driver of capital inflows, and a decline in sovereign credit risk leads to increased foreign direct investment and portfolio inflows. Furthermore, the estimation results demonstrate the importance of the country’s specific pull factors and reveal that a country characterized by a larger market size, better institutional quality, a stable macroeconomic environment, and a more developed financial market could attract more capital inflows. Moreover, the results highlight that global risk and liquidity push factors have a significant effect on driving cross-border capital inflows into the Balkan economies. The findings suggest that policymakers should reduce sovereign credit risks and increase the country’s absorptive capacity and competitiveness in order to attract more capital inflows to the investigated Balkan countries.

서울 아파트 가격의 변동 분석

During President Moon’s 5-year term, housing prices in Seoul increased by 62%, leading to widespread public uproar and ultimately his removal from office. Many factors have been proposed as potential explanations including speculation, the pandemic, excessive global liquidity, household debt, insufficient housing supply, and the government’s frequent policy interventions in the market. We simulate the impact of government factors on housing prices, considering them as exogenous variables (regime factor) and endogenous variables (policy interventions). In addition to the pandemic-induced price hike, most price increases under the Moon administration can be attributed to government factors. In May 2022, the conservative government succeeded the Moon government, leading to a rapid mean reversion of the house price to the long-run price.

Global liquidity effect of quantitative easing on emerging markets

Global liquidity effect of quantitative easing on emerging markets

Technological lock-in developing countries: The role of external financing

Liabilities denominated in foreign currency have established a permanent role in emerging market firms’ balance sheet, which implies that changes in both global liquidity conditions and in the value of the currency may have a long- lasting effect for them. In order to consider the financial conditions that may encourage (discourage) structural change in a small, open economy, we adopt the framework put forward by the “Monetary theory of distribution” (MTD). More specifically, we follow the formulation adopted by Dvoskin and Feldman (2019), whereby the financial system is intended as a basic sector that promotes innovation (Schumpeter, 1911). In accordance to this, financial conditions are binding only for the innovative entrepreneurs, whose methods of production are not dominant and hence they need to borrow from banks to kick- start their production. Through this device, our model offers an explanation to the technological lock-in experienced by a small, open economy which takes international prices as given.

Crude credit: The political economy of natural resource booms and sovereign debt management

Oil, gas, and minerals have notoriously adverse effects on institutional quality. But when global liquidity is high, risk-tolerant investors are more willing to lend to all borrowers, even resource-rich countries with low-quality institutions. Despite the availability of cheaper credit during commodity booms, we argue that countries do not increase current borrowing to mitigate future revenue shortfalls during commodity busts. Instead, they rely on resource windfalls to meet their current financing needs, fearing they would otherwise forfeit national policy discretion to global financial markets. We leverage primary evidence from extensive field research across five Latin American countries to show that national economic officials (i.e. finance ministers and central bank governors) are wary of high indebtedness, after past commodity booms ended in cycles of lofty spending, borrowing, and default. For sovereign borrowers, high bond market indebtedness often reduces government discretion over economic policy, whereas windfalls increase it; all else equal, governments will favor the latter. Using data on 22 Latin American and Caribbean countries from 1996 to 2020, we find that governments issue bonds less frequently, in smaller amounts, as their oil and gas production or GDP share from resource rents increases. These findings make an important contribution to our understanding of how commodity cycles affect global capital markets: sovereign borrowers do not fully leverage commodity booms to expand their fiscal space to finance more spending over time.

SYSTEMIC ENDOGENOUS AND EXOGENOUS HAZARDS TO MODERN GLOBAL MONETARY AND FINANCIAL STABILITY

This article explores the systemic endogenous and exogenous threats facing global monetary and financial stability amidst escalating geo-economic fragmentation. It critically examines the evolving dynamics in the dominance of traditional currencies, particularly the US dollar, in light of the emergent roles of the euro and the yuan, contextualised by global financial interdependencies and rapid advancements in digital technology. The study underscores the traditional criteria for an international currency – including economic stability, openness to trade and capital, and the depth and liquidity of financial markets – and supplementsthese with the contemporary necessity for institutional robustness. A thorough literature review reveals vulnerabilities within the global banking system exposed by recent stress tests, highlighting the fragility of banking liquidity. It also examines the impacts of geopolitical tensions and rapid technological transformations, such as the effect of social media on financial markets and the swift movement of capital. The discussion extends to the implications of geopolitical fragmentation on global liquidity and economic stability, emphasising the critical need for robust preventive measures and a regulatory framework adaptable to evolving financial threats. The core findings of this research emphasise that effective regulatory reforms aimed at enhancing financial stability could alleviate the volatility of capital flows and diminish systemic risks, thereby reinforcing the status of certain currencies as international reserves. The paper posits that for a currency to qualify as an international reserve, it must possess assets that ensure value stability and exhibit minimal price impact during financial disruptions. Methodologically, this study employs a blend of theoretical and empirical approaches, merging quantitative and qualitative analyses to address its research objectives comprehensively. Given the current global financial uncertainties and shifts in the international currency arena, this paper is crucial for policymakers, financial analysts, and academic researchers engaged in the discourse of international finance.

Global liquidity spillovers in the Asia–Pacific region: policy-driven versus market-driven effects

This research investigates the spillovers of global liquidity to Asia–Pacific countries, focusing on the contradictory effects of policy-driven liquidity created by monetary stances in advanced economies and market-driven liquidity generated by the private banking sector. Our findings stand in sharp contrast to previous studies, showing that shifts in macro-financial indicators in Asia–Pacific economies are predominantly influenced by market-driven shocks rather than those of policy-driven liquidity. Specifically, liquidity shocks associated with surges in cross-border credit flows, especially those denominated in US dollars, drive up asset prices and have boosting effects on inflation and economic output. A positive shock to market liquidity also results in an appreciation pressure on domestic currencies and a short-term rise in interest rates. However, excess liquidity shocks caused by the Bank of Japan’s adjustments in shadow short rates and balance sheets have a negative effect on inflation and bring about temporary depreciation pressure on Asian currencies. Surprisingly, we find that Asian responses to financial easing associated with the Fed’s monetary policy change are not well-pronounced.

Asymmetrical Effects of Global Liquidity and Global Economic Output on Domestic Economic Growth: Evidence from India based on NARDL Approach

The augment of economic globalisation and financial integration in the past few decades has changed the dynamics of international developments. This has resulted in discussions on the immediate and frequent impact of global factors on emerging and developing economies. The objective of this research is to determine how the global economy’s output and liquidity affect India’s economic growth. The period of the study chosen is from 2000 to 2019 (quarterly). The empirical findings from the application of the NARDL approach suggest that the increase in global economic output increases domestic growth. Domestic economic growth is boosted by rising global liquidity, but both falling global liquidity and falling global economic production have no statistically significant results. JEL Codes: B22, C32, F21, F36, F43

IPO subscription dynamics: A comprehensive inquiry into the Indian stock market

The Indian IPO market showcased resilience during the global stock market downturn in 2022, emerging as a notable bright spot in regions such as Europe, the Middle East, India, and Africa. As the bullish rally of 2022 persists, Indian stock markets remain enticing for foreign institutional investors in 2023. A resurgence in IPO activity is anticipated, driven by increasing momentum and larger deals that are poised to overcome the constraints of subdued global sentiments and liquidity pressures, addressing the challenges posed by these factors. The study offers insights into factors influencing IPO subscriptions, capitalizing on the context of heightened stock market volatility and optimistic trends in the Indian stock market. A total of 132 IPOs listed on the Indian stock market between April 2019 and March 2023 were analyzed in this study. Multiple Linear Regression was used to assess the strength of the association between several factors outlined in the literature, and the overall subscription. Among the ten variables investigated in the study, it was observed that three variables under the external factors, specifically Grey Market Premium, IPO Rating, and Broker Recommendations, exerted a significant influence on the overall subscription. While other factors such as allocation proportion and issue attributes, were found to have no discernible influence on the overall subscription. The results indicate that the Indian IPO market demonstrates a prevalence of speculative behavior and a stronger reliance on expert recommendations, rather than being primarily driven by IPO characteristics. Acknowledgment Authors acknowledge that the publication fee is funded by Kingdom University, Bahrain.

The Influence of Federal Reserves Interest Rates Hike Cycle on Transnational Corporations

The monetary policy of the United States has a broad and profound impact on the world economy and financial markets. Due to the critical position of the US dollar in the world economy, the US monetary policy will directly affect countries and economies worldwide, and the liquidity of the US dollar is also the foundation of global liquidity. The series of interest rate increases implemented by the Federal Reserve starting in 2022 has led to the appreciation of the US dollar index, which has significantly impacted the import costs and overseas sales of domestic and multinational companies in the United States. This article selects the global multinational technology company Apple and extracts daily closing data from June 2022 to April 2023 and the USD index for the same period. This study applies the VAR model to assess the correlation between both and uses the ARMA-GARCH-X model to analyze the impact of USD index on the volatility of Apple stocks. This study analyzes the impact of interest rate hikes on multinational corporations and provides management and investment advice to their stakeholders.

Impact of global liquidity on Indian financial markets and monetary policy outcomes: An ARDL approach

Liquidity management is essential for the financial framework of any economy, especially for operationalizing monetary policy. The relatively resilient Indian financial system experiences the transmission of global liquidity shocks, which results in a reversal of portfolio flows from domestic markets resulting in central bank interventions. This paper examines the impact of global liquidity shocks on key financial and monetary variables of the Indian economy using quarterly data for the period 2000–2018 using an autoregressive distributed lags framework. We find the presence of long-run relationships between global liquidity variables (such as the US treasury bill rate, CBOE-VIX index, and US broad monetary aggregate) and the Indian financial markets (NSE Nifty index) and the monetary policy outcome (91-day Treasury bill rate). In the short run, the results were significant for the impact of the risk aversion measure on domestic policy rate in line with the expectations channel. The exchange rate channel and global money supply also significantly impacted the Indian policy rate. The results have significant policy implications as they indicate the most optimal transmission channels through which global liquidity affects the Indian economy.

Financial crisis, global liquidity and trade credit channel: Evidence from Türkiye

This paper examines the role of trade credit in the transmission of global liquidity conditions. Specifically, we investigate whether trade credit complements or substitutes the decline in bank lending activity as global liquidity tightens. Using a detailed bank and firm-level dataset for Turkish firms, we find that firms which are more bank-finance constrained have less access to trade credit as global liquidity tightens. The rate of trade credit tightening is amplified during crisis periods. While bank-finance constrained firms receive significantly less trade credit from suppliers, they reduce the amount of trade credit that they extend to customers even more, implying that tightening trade credit conditions propagate further through supply chains. In addition, trade credit conditions deteriorate more for small firms and for cash-poor firms in times of crisis.

Global Liquidity: Drivers, Volatility and Toolkits

Global Liquidity: Drivers, Volatility and Toolkits

The International Monetary System’s Structural Flaws, a Process of Economic Development, and the Job Guarantee

The international monetary system currently suffers from three structural flaws that disproportionately affect developing nations: an asymmetric balance of payments adjustment mechanism, the Triffin Paradox, and an inequity bias against developing nations. Thus, as currently constituted, this global monetary framework is biased against the development prospects of developing nations and is antagonistic to their development efforts. However, the author’s contention is that developing countries can use a Job Guarantee (JG) to address these shortcomings because it offers five significant international macroeconomic benefits that involve presenting developing nations with an enhanced degree of domestic policy options, altering how global liquidity is provisioned and the need for acquiring it, and inciting a direct challenge to the neoliberal conventional wisdom of global political economy. As a result, developing nations can use a JG as a cornerstone in any development strategy that seeks to sustainably mobilize underemployed labor resources and increase productive capacity and utilization rates while remaining free of the structural constraints imposed by the international monetary system. JEL Classification: B52, O11, F40

International linkages of term structures: US and Korea Treasury bond yields

This study analyzes the international linkages of term structures between the United States (US) and Korea using a Gaussian dynamic term structure model. The empirical analysis shows that the US level factor makes the most important contribution to the Korean term structure fluctuations. When two separate channels (i.e., policy and risk-compensation) are considered for propagating structural shocks into Korean bond yields, the policy channel dominates for the short-term rates, whereas for the long-term yield, the policy channel is dominant for the US level shock, but the risk channel is dominant for other shocks. These results are sensitive to whether or not small-sample bias is corrected. With a help of the bias correction, term premium estimates in the US and Korea exhibit substantial countercyclicality with respect to the US output gap. The US slope factor, which also has a significant impact on Korean long-term yields, is closely related to the global liquidity conditions for Korean bond returns.