Global Liquidity Research Articles

The impacts of global liquidity on international housing prices

PurposeThe purpose of this paper is to examine how global liquidity affects international housing prices. The data sample covers 35 economies from 2000Q1 to 2017Q4.Design/methodology/approachThe existing papers seldom investigated whether the impacts of global liquidity on housing prices display differences between advanced and developing economies. Cesa-Bianchi et al. (2015) is an exceptional study in that they focused on the impulse response of house price volatility to global liquidity shocks but did not examine the long-run equilibrium relationship. To fill the gap in the existing research, this paper used panel cointegration of Pedroni (2000, 2004) to estimate the long-run linkage between global liquidity and housing prices in both advanced and developing economies, and generalized impulse response function (GIRF) and generalized variance decomposition (GVDC) were also applied to capture the relative strengths and contribution of global liquidity shock on house price volatility.FindingsFirst, the global liquidity elasticity of housing prices is 0.0679 in developing economies, and 0.0454 in advanced economies, implying that the positive effect of global liquidity on housing prices is higher in developing economies. Next, the results of generalized impulse response indicate that the innovation of global liquidity can significantly and positively impact housing prices only in developing economies and the duration is two quarters. Third, in light of the long-run portions of the global liquidity shock on house price volatility in individual economies, the two highest portions are 28.51% in the USA and 20.04% in the UK, while there are low portions, less than 10%, in most of the European economies. Moreover, comparing the long-run contributions of global liquidity and other variables shock on house price volatility, the contribution of the global liquidity shock ranks the highest or second highest in 21 out of 35 economies, confirming that it played a more important role than other economic variables in explaining house price volatility for most economies.Originality/valueCompared with the related literature, the contributions of this paper are as follows. First, except for Cesa-Bianchi et al. (2015), the existing papers seldom investigated whether the impacts of global liquidity on housing prices display differences between advanced and developing economies. Hence, the study adopted a wider data sample, including 7 developing economies and 28 advanced economies, to examine the differences in the impact of global liquidity on housing prices between advanced and developing economies. Second, most of the relative literature calculated global liquidity by applying a monetary aggregate, such as M2 or M3, while Cesa-Bianchi et al. (2015) argued that global liquidity being measured by the international supply of credit is intuitively connected to housing prices. This paper follows the argument of Cesa-Bianchi et al. (2015) to use the international supply of credit as the measure of global liquidity, and both the long-run effects and the short-run relative strengths of global liquidity on housing prices are analyzed. Hence, this paper uses not only the GIRF to discuss the short-run relative strengths, as with Cesa-Bianchi et al. (2015) but also the panel cointegration of Pedroni (2000, 2004) to identify the long-run linkage between global liquidity and housing prices. Moreover, GVDC was used to estimate the contribution of a global liquidity shock on house price volatility in individual economies, which can confirm that global liquidity innovations are a very important factor in explaining house price volatility in most countries.

Banks During the Pandemic: A Japanese Perspective

In recent years, Japanese banks have revived their leading international role in the provision of global liquidity. Since the start of the pandemic of COVID-19, Japanese banks have increased their overseas lending at a much higher pace. This article looks at the activities of Japanese banks, and the drivers behind such a surge by considering factors that characterize the domestic economy. It is argued that uncertainties associated with COVID-19, and government response by means of introducing numerous unconventional measures to counter adverse effects of the pandemic, have increased cash hoarding in the economy. Japanese banks have seen a surge in the deposits held, as well as a decline in loans. Data from the Senior Loan Officer Opinion Survey on Bank Lending Practices at Large Japanese Banks reveals that the demand for loans from all size firms and households has declined since mid-2020. Faced with ongoing razor-thin margins and prolonged low interest rates at home, Japanese banks have continued their overseas activities in a search for yield; and they have increased their exposure to offshore financial centers which could have potential domestic financial stability implications.

How liquidity is driving inflation and asset prices

▪ Over the last two decades China's role as the lead provider of global liquidity has diminished, while the US has stepped up to fill most of the gap. This will matter when quantitative tightening begins in earnest – advanced economies' monetary retrenchment will have more significance for global financial markets. ▪ But we think changes in the effectiveness of monetary policy, plus the mix of monetary and fiscal policy, should dampen some of the shock. ▪ On one side, the money multiplier (a ratio of broader money to the monetary base) has fallen in the US and eurozone since 2020, when the monetary expansion started, as banks have parked money in excess reserves. So the effects of quantitative tightening will likely be proportionately milder than those seen in 2018. ▪ On the other side, fiscal policy has changed substantially during the pandemic crisis – a decided turn towards fiscal exuberance, coupled with a different structure to budget spending. Whereas post‐GFC discretionary fiscal spending was largely aimed at support for the ailing financial sector, post‐pandemic spending has been directed towards social transfers and discretionary spending aimed at supporting household budgets. We've found a noticeable correlation between budget transfers and inflation in the post‐pandemic period. ▪ A combination of higher liquidity with a lower money multiplier should then mean the costs of quantitative tightening are relatively lower in terms of real activity and financial market performance. As for inflation, it's more likely to be restrained by the retrenchment from the fiscal expansion that played a (possibly decisive) role in unleashing it in the first place.

Old and new proposals for global monetary reform

The post-Bretton Woods monetary system in characterised by the hegemony of the US dollar despite increasing features of a multi-currency system. There is no other currency in sight to succeed the dollar. Yet there are severe downsides that seem to increase on several fronts. The paper diagnoses five major challenges: exchange rates driven by non-fundamentals, current-account imbalances, a hierarchy of interest rates (including dependency from US monetary policy), commodity-price bonanzas, and lack of global liquidity in hard currency. Major reform proposals are reviewed, focusing on reforms of Special Drawing Rights on the one hand and on a new exchange-rate system on the other. Regarding the latter, a novel system is proposed, focused on the largest foreign-exchange market, the dollar–euro market. The proposal includes target zones, mutual interventions, and a Tobin tax on currency transactions. A precondition is strengthening the international role of the euro. The currency blocs on both sides of the North Atlantic could form a bloc of more than 80 countries. The new system of managed floating could later be extended by other reserve currencies. More exchange-rate stability around the globe would reduce the country risk premiums in the Global South and trigger other positive externalities.

The Macroeconomic Effects of Global Liquidity: A Global VAR Approach

The Macroeconomic Effects of Global Liquidity: A Global VAR Approach

Глобальні фінансові цикли і проблема регулювання міжнародних потоків капіталу: роль банків і макропруденційної політики у протидії кризам

The aggravation of crisis processes in the global financial system produces a request to find tools to eliminate the systemic risk of global instability, which arises primarily through the interaction between the global financial cycle, key global factors (global risk and monetary policy in major economies) and cross-border banking activities. The situation in the monetary and financial spheres of countries with large open economies has a powerful impact on the economic situation, exacerbating the asymmetries of interaction on a global scale, which actualizes the need for macroprudential authorities in countries with small open economies to take preventive measures to maintain internal balance from destructive crisis processes in key economies of the world. The article provides a comprehensive analysis of approaches to substantiating the channels of mutual influence of the internal financial cycle, the global financial cycle and macroprudential policy, and also assesses the potential of macroprudential policy in smoothing out procyclical processes in order to stimulate economic growth. The interdependence of global banks on the dynamics of the global financial cycle and vice versa is determined, because global banks determine the specifics of the manifestations of the latter, given the way they manage their liquidity on a global scale, thereby contributing to the international transmission of shocks. It is found that the existence of a domestic capital market for global banks exacerbates the international spread of domestic liquidity shocks due to the strategic complementarity effect arising from strategic interactions between banks, other financial institutions and agents, which can increase systemic vulnerabilities during booms and busts due to increased competition between banks. It was revealed that the impact of the global financial cycle on the internal financial environment of banks and financial institutions through the mechanisms of external obligations of national banks and the determination of the cost of financing affects the availability of loans for companies and households. This means that the economies of small open economies are more vulnerable to external shocks and are affected by financing conditions determined in the world's financial centers. Under these conditions, the dynamics of global liquidity limits the effectiveness of national monetary policy, and therefore the demand for effective international coordination of macroprudential policy becomes even more urgent. The need to revise monetary policy in order to increase its ability to mitigate the risks of financial instability depends on: (1) the effectiveness of macroprudential policy (for example, the ability to manage the financial cycle); (2) the contribution of monetary policy (including its traditional and non-traditional instruments) to the exacerbation of financial instability; (3) the degree of independence of monetary policy, especially during a crisis.

Effects of Global Liquidity and Commodity Market Shocks in a Commodity-Exporting Developing Economy

Effects of Global Liquidity and Commodity Market Shocks in a Commodity-Exporting Developing Economy

Commitment to capital raising for venture capital funds in India: An Application of ARDL Model

Venture capitalists (VCs) áourish on the ability to add funds to their kitty across nations. Consequently, VCsíability to convince Limited Partners (LP), who are their primary source of Önancing, plays a critical role in the venture capital investment growth in any economy. However, it is not easy to rake in capital from an investor. LPs assess the market conditions carefully before making their capital available to the VCs. This paper examines the macro-economic variables that ináuence the supply of money to venture capital funds in emerging economies such as India from an LPs perspective. The empirical analysis using Autoregressive-Distributed Lag (ARDL) approach reveals that supply of capital to the VC funds in India is ináuenced by macro variables as well as past investment behaviours. Macro-variables such as GDP growth, interest rate spread, global liquidity, and ináation rate signiÖcantly ináuence the supply of capital to the VC funds in India. However, stock market liquidity does not ináuence the supply side of the venture capital investment. Our analysis reveals that VCsífund raising in India is highly ináuenced by their past investment relation with the LPs.

Liquidity commonality in sovereign bond markets

This paper documents commonality in the liquidity of sovereign bonds. We show that local market-level liquidity changes exert a substantial influence on the liquidity of single bonds. Unlike in equity markets there is only little evidence that changes in global liquidity affect the liquidity of individual sovereign bond markets. Instead, we document the occurrence of negative cross-market correlations of liquidity across several markets and time periods. The results further suggest that diverging monetary policy and the flight-to-safety phenomenon contribute to this decoupling in liquidity correlations.

Formulation of a Regulatory Regime for Cryptocurrencies in India

During the pandemic year 2020, cryptocurrencies have surfaced as a hedge against the financial uncertainty raised by COVID-19. Virtual currencies have emerged as a focus area for the investors to re-engage their interest and overcome the financial instability. Income tax department has been keeping a close vigil on these Virtual currencies. We have also seen a boost in the valuation of Bitcoin due to Global Liquidity injected by Central Banks. Cryptocurrencies still do not have any formulated appropriate legislation to provide clear vision for cryptocurrencies’ future in India. The present paper is an attempt to highlight the potential of cryptocurrencies and the need for the formulation of appropriate legislation so that investors can perform their transactions safely.

A closer look into the behavior of emerging market sovereign spreads: State-dependent and asymmetric behaviors

We analyze state-dependent and asymmetric behavior of emerging market (EM) sovereign bond spreads in response to changes in global risk appetite and liquidity. We use dynamic Markov-switching, fixed-effect panel threshold, and time-varying causality analyses along with our research setting. Empirical results provide evidence for both state-dependent and asymmetric behavior of EM sovereign spreads. We also find that these behaviors became even more pronounced after the global financial crisis (GFC). EM external debt markets display more sensitivity to good news in the post-GFC era. Global liquidity's impact on EM sovereign spreads displays a more complicated dynamic than the global risk appetite.

Contagious margin calls: How COVID-19 threatened global stock market liquidity

The outbreak of the COVID-19 pandemic caused some of the largest – and fastest – market dislocations in modern history. During the outbreak, liquidity quickly evaporated in a coordinated fashion across global markets. We show that a sudden increase in margin requirements during the pandemic is correlated with the withdrawal of global liquidity providers. These effects are concentrated in securities most exposed to high-frequency market makers, consistent with the binding nature of increased capital constraints.

The Influence of Global Financial Liquidity on the Indonesian Economy: Dynamic Analysis with Threshold VAR

Empirical studies of the global liquidity spillover on Indonesia’s economy are still relatively limited. Most of the global contagion literature on Indonesia’s economy focuses only on the effects of real shock (on output) due to financial shock. We assert that the effect of global output on Indonesia macroeconomic conditions is a fairly relevant issue to be studied. This research aims to investigate the interdependent relationships between world GDP, world commodity prices, world inflation, trade flows, capital inflow, capital account transactions, reserve accumulation, global liquidity (e.g., global broad money), and monetary aggregates, with regard to Indonesia’s GDP variables and inflation. This paper uses threshold vector autoregression (TVAR) to capture regime changes in the variables of the world economy. World economic data and Indonesia’s economic data were utilized to prove different responses to the world economic situation in two different regimes. This research identified two groups of upper regime and lower regime world variables—namely, world inflation, world GDP, and world commodity prices. TVAR estimation resulted in a smaller residual sum of squares compared to VAR estimation. Different regimes resulted in differences in Indonesia’s economic responses due to the shock of world economic variables. The findings generated by this research are expected to be insightful to monetary policymakers in Indonesia.

Modeling of Crisis Processes in the Financial Market

Global liquidity shortage as well as the availability on the market of overpriced assets and derivatives led to the situation where the global economy depends primarily on liquidity, becoming prone to chain-consistent world crises. Only for the last 15 years, the world has witnessed a continuous series of crises. Therefore, the study of the processes and phenomena of crisis is one of the most important scientific and practical tasks. The aim of this work consisted in the development of methods and models for the early detection of crises in the economy. The significance of the work is to develop an econometric model and tools for detection of crisis.

Global Capital Cycles and Market Discipline: Perceptions of Developing-Country Borrowers

AbstractDeveloping countries are often thought to be particularly exposed to the constraints of global markets. Facing scrutiny from foreign investors, why do developing-country governments enter international bond markets, especially when they can access cheaper finance from international financial institutions? I argue that borrowing governments' perception of market constraints depends on global liquidity. When bond markets are highly liquid, investors become more risk acceptant and governments perceive the political costs of borrowing to be lower, especially compared to the conditionality of concessional loans. I use data on the timing of bond issues and three case studies—Ethiopia, Ghana, and Kenya—to demonstrate that choices to issue debt were shaped by global liquidity. These findings nuance debates about how markets constrain governments, emphasizing that market constraints are conditional on systemic factors, including, global liquidity.

Trends and determinants of raising ECBs in Indian Context

This study examines the effect of capital control measures initiated during the last two decades in terms of all-in-cost ceilings and enhanced limits on ECB in India over the sample period 2004Q1 to 2020Q2. Using global liquidity, the exchange rate between INR/USD, imports and interest rate differentials as control variables and changes in capital control measures from 2008 to 2011 in the all-in-cost ceiling, and changes in the enhanced limits on ECBs from USD 500 million to USD 750 million under the automatic route in 2012, regression analysis of three ECB series show interesting results. Using Robust Least Squares method, we document that (1) the successive increment in all-in-cost ceilings on ECB from 2008 to 2011 is inducing ECBs to flow, indicating that Indian firms benefit more than they pay due to increase the cost for ECBs having maturities 3<5 years. However, such capital control measures are not effective on ECBs having maturities >5 years. (2) The effect of the enhanced limits on ECBs from USD 500 million to USD 750 million under the automatic route in 2012 has a pronounced impact on ECB, averaging 1602.1 USD million per quarter. We observed that CCAs in India are initiated in response to the volatility of the exchange rate and global liquidity, imports, and interest rate differentials are significant variables in India's required capital control actions.

Governing Global Liquidity: Federal Reserve Swap Lines and the International Dimension of US Monetary Policy

ABSTRACT Since the use of swap lines during the global financial crisis, the Federal Reserve is widely seen as international lender of last resort. Yet the focus on emergency liquidity assistance tends to obscure the broader significance of swap lines for US monetary governance. As this article shows, swap lines have historically played a crucial and evolving role in structuring and facilitating specific practices of offshore Eurodollar liquidity production in the interest of US monetary policy. A key contemporary example can be found in the uptake of swap lines during the Covid-19 market turmoil in early 2020: swap lines alleviated offshore dollar funding conditions to such an extent that they also triggered reverse inflows of dollar liquidity back into the US. More than simply providing a backstop to the global system, these swap interventions effectively restructured cross-border financial flows in a way that afforded the Fed greater control over domestic markets. Yet as the capacity to influence global liquidity conditions appears increasingly crucial to the Federal Reserve’s control over domestic monetary conditions, these interventions pose broader questions about its role in managing instable and evolving cross-border credit relations that link domestic and global markets.

Global liquidity and commodity market interactions: Macroeconomic effects on a commodity exporting emerging market

This paper examines the effects of commodity demand and supply shocks as well as international liquidity shocks on the small open economy of Brazil using an SVAR model. The paper highlights the importance of modelling both types of shocks in the commodity sector. Including only commodity prices overstates the effect of commodity price shocks on the output of Brazil. Commodity demand shocks are much larger than commodity supply shocks in the long run. Including commodity demand and international liquidity also reduces the impact of commodity price shocks on the interest rate made available to Brazil in international capital markets. There is little evidence of Dutch disease for Brazil. However, our results show that Brazil is vulnerable to external shocks.

Interlinkages between external debt financing, credit cycles and output fluctuations in emerging market economies

This paper examines the role of external debt financing (EDF) in shaping the credit cycles and the joint implications of EDF flows and credit growth for the output volatility in ten major emerging economies. We find that extreme phases—known as surge and stop episodes—in EDF flows are significantly associated with credit surges and stop episodes as shown by a panel multinominal logit estimation. However, the association is asymmetric—EDF stop episodes are more likely to bring about a credit stop episode compared to the occurrence of credit surges due to EDF surges. The results suggest vulnerabilities of credit cycles of EMEs to the sharp movement in EDF flows which in turn is typically synchronized with global liquidity conditions. In the second part of our analysis, using the bias-corrected LSDV estimation for the dynamic panels, we find that EDF flows and credit jointly have a strong amplifying impact on the output volatility. Moreover, EMEs also face large output volatility when EDF stop and credit stop episodes occur together. The results implicate a broader welfare loss in the form of output fluctuations due to a strong synchronization between external debt financing and domestic credit conditions. Significant output fluctuations are also a cause of concern for policymakers in EMEs who seek to insulate their economies from external and domestic financial shocks.

Risk of Global External Cereals Supply under the Background of the COVID-19 Pandemic: Based on the Perspective of Trade Network.

International food trade is an integral part of the food system, and the COVID-19 pandemic has exposed the fragility of external food supplies. Based on the perspective of cereals trade networks (CTN), the pandemic risk is combined with the trade intensity between countries, and an assessment model of cereals external supply risk is constructed that includes external dependence index (EDI), import concentration, and risk of COVID-19 from import countries index (RICI). The results show that: (1) the global main CTN have typical scale-free characteristics, and seven communities are detected under the influence of the core countries; (2) about 60%, 50%, and 70% of countries face risks of medium and above (high and very high) external dependence, concentration of imports, and COVID-19 in the country of origin, respectively. Under the influence of the pandemic, the risk of global external cereal supply index (RECSI) has increased by 65%, and the USA-CAN communities show the highest risk index; (3) the countries with a very high risk are mainly the Pacific island countries and the Latin American and African countries. In addition, Japan, Mexico, South Korea, and 80% of the net food-importing developing countries are at high or very high RECSI levels. Approximately 50% of countries belong to the compound risk type, and many export countries belong to the RICI risk type; (4) global external food supply is subjected to multiple potential threats such as trade interruption, “price crisis”, and “payment dilemma”. The geographical proximity of community members and the geographical proximity of the pandemic risk is superimposed, increasing the regional risk of external food supply; and (5) this study confirms that the food-exporting countries should avoid the adoption of food export restriction measures and can prevent potential external supply risks from the dimensions of maintaining global food liquidity and promoting diversification of import sources. We believe that our assessment model of cereals external supply risk comprises a useful method for investigations regarding the international CTN or global food crisis under the background of the pandemic.