Abstract

The expansion of global liquidity, exacerbated by the unconventional monetary policies implemented by the major central banks over the past several years, has contributed to the debate on the cross-border impact of those measures. This paper examines the impact of global excess liquidity on asset prices for a set of seventeen emerging market countries taking into account nonlinearity by using a panel threshold model. We find that in a period of global investors' high risk appetites, global excess liquidity is a positive determinant of asset prices in emerging market countries. However, the link between the two variables changes when global risk aversion strengthens.

1. Introduction

The 2007–2009 global financial crisis sparked a renewed interest in the topic of global liquidity by those involved in the policy debate. In the context of severe financial market disruptions and impaired financial intermediation following the Lehman Brothers collapse, central banks aggressively lowered their rates to near zero and ultimately used unconventional measures to address issues related to shortages in many financial market segments. These non-standard monetary policy measures, which ranged from forward guidance to credit and quantitative easing, have contributed to the boom in global liquidity. In particular, quantitative easing measures have consisted of a massive expansion of central bank balance sheets via several asset purchase programs.

6. Concluding remarks

Global excess liquidity, proxied by the ratio of world monetary base to world nominal GDP, increased steadily from the mid-1990s before accelerating sharply because of unconventional monetary policies established by central banks in advanced economies. Only a few studies have focused on the international spillovers of those policies, particularly with respect to their impact on emerging market countries. The primary conclusions that can be drawn from those works are mixed with respect to a positive relationship between liquidity and asset prices, although they do not consider the probable empirical nonlinearities in the relationship.