International liquidity monetary spillovers and asset prices
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“INTERNATIONAL LIQUIDITY, MONETARY SPILLOVERS AND ASSET PRICES”. Daniel Borja & Daniel Goyeau. Summary. International Liquidity  Asset Prices U.S., Euro Area & ASEAN 5 Quarterly Data: 1995 to 2005 Liquidity Definition U.S.  Reciprocal Effects  Euro Area

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“INTERNATIONAL LIQUIDITY, MONETARY SPILLOVERS AND ASSET PRICES”

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International liquidity monetary spillovers and asset prices

“INTERNATIONAL LIQUIDITY, MONETARY SPILLOVERS AND ASSET PRICES”

Daniel Borja

&

Daniel Goyeau


Summary

Summary

  • International Liquidity  Asset Prices

    • U.S., Euro Area & ASEAN 5

    • Quarterly Data: 1995 to 2005

  • Liquidity Definition

  • U.S.  Reciprocal Effects  Euro Area

  • ASEAN 5: No Spillover Effect


Presentation structure

Presentation Structure

  • Introduction

  • Liquidity Definition

  • Methodology

  • Results and Findings

  • Conclusion


Liquidity and asset prices

Liquidity and Asset Prices

  • Tenuous Link?

Effect of Financial Globalization

Greater Synchronization of Markets

Monetary Spillover


What is liquidity

What is Liquidity?

  • Two Concepts of Liquidity, Baks and Kramer (1999)

    • Market Liquidity

    • Monetary Liquidity

      • Money growth

      • Excess money growth


What is liquidity1

What is Liquidity?

  • Various Measures of Excess Liquidity, ECB (2001)

    • Nominal money gap and real money gap

    • Monetary overhang/shortfall

  • Based on Quantity Theory of Money, Gouteron, et al (2005)

    • M + V = P + Y


What is liquidity2

What is Liquidity?

  • International Liquidity Ratio, Filho (2002)

    • The ratio of the net foreign reserves against the net foreign interest-bearing debt

    • Crucial liquidity ratio

  • International Liquidity, Caballero, et al.(2000 & 2001)

    • Collateral

    • Precautionary Reserves

    • Liquidity-based model of domestic interest rate determination


What is liquidity3

What is Liquidity?

  • Macro and Micro-based Measures, Fernandez (1999)

    • Aggregate measures

      • Excess liquidity: monetary aggregate growth

      • Credit available

      • Degree of Leverage

    • Micro-based

      • Depth

      • Breadth

      • Resiliency


Liquidity definition

Liquidity Definition

  • Problems with micro-based measures

  • Problems with “asset-debt” ratio

  • International Liquidity: EXCESS MONEY GROWTH


Liquidity and asset prices1

 Liquidity and Asset Prices

  • Excess Liquidity

    |

  • Increases Demand for a Fixed Supply of Assets

    |

  • Asset Price Inflation

*Baks and Kramer (1999)


Liquidity and asset prices2

 Liquidity and Asset Prices

Improving Economic Prospects

Excess Liquidity Asset Price Inflation

*Baks and Kramer (1999)


Liquidity and asset prices3

 Liquidity and Asset Prices

  • Excess Liquidity

    |

  • Decrease in the Discount Rate

    |

  • Asset Price Inflation

*Baks and Kramer (1999)


International liquidity channels

International Liquidity Channels

Push Channel

Excess Liquidity

Seek Out Foreign Markets

Foreign Asset Price Inflation

Pull Channel

Excess Liquidity

Attract Foreign Capital

Depress Foreign Asset Price


Dataset

Dataset

  • U.S., Euro Area and ASEAN 5 (Indonesia, Malaysia, Philippines, Singapore and Thailand)

  • Quarterly Data: 1995 to 2005

  • M1, M3, real and nominal GDP, short-term interest rates, share price indices, consumer price indices and exchange rates


International liquidity monetary spillovers and asset prices

Data

  • Growth rates

  • Local currency into USD or euros

  • ASEAN 5 DATA

    • Simple Sum

    • Weighted Growth Series


International liquidity monetary spillovers and asset prices

Data

  • Excess Money Growth

    • Quarterly money growth minus quarterly growth rate of nominal GDP

  • Real Returns

    • Share price returns/short-term interest rate minus consumer price inflation


Money growth rates

Money Growth Rates


Excess money growth rates

Excess Money Growth Rates


Money growth rates1

Money Growth Rates

  • Correlated: ASEAN 5 simple sum and weighted growth rates series

  • Money growth rates for ASEAN are more volatile

  • Excess money growth rates for Euro area are more volatile


First regression form

First Regression Form

R i, t = c + A(L)mi, t + B(L)mj, t

+ C(L)m k, t + D(L)v i, t + ε i, t

where:

R i, t = real stock return

m = money growth of markets i, j and k

v i, t = velocity of money


Velocity of money

Velocity of Money

  • Ratio of nominal GDP and broad money(M3)

  • Significant change in money velocity in the three areas during this period


Monetary spillover regression

Monetary Spillover Regression

R i, t = c + aRi, t-1 + B(L)xmi, t + C(L)ri, t + D(L)yi, t

+ E(L)pi, t + F(L)vi, t + G(L)xmj, t + H(L)xmk, t + ε i, t

where:

R i, t = real stock return

xmi, t = excess money growth

ri, t = real short-term rate

yi, t = real gdp growth (USD)

pi, t = inflation rate

vi, t = velocity of money


Results

Results

  • Results using narrow money are more robust than the regression results using broad money

  • Regressions for the ASEAN 5 using a weighted series and simple summations gave similar results


Us real market return

Money growths of the three markets are not statistically significant

US Real Market Return


Euro area real market return

Euro area money growth is significant

Euro Area Real Market Return


Asean 5 real market return

ASEAN 5 money growth is significant

ASEAN 5 Real Market Return


Us real market return1

US Real Market Return

  • Inflation is statistically significant

  • Money velocity remains significant

  • Evidence of a push channel from Euro area to the US


Euro area real market return1

Euro Area Real Market Return

  • Real GDP growth and Euro area excess M1 growth are statistically significant

  • Spillover: Push of money from US to the Euro area


Asean 5 real market return1

ASEAN 5 Real Market Return

  • Real GDP growth and ASEAN 5 excess M1 growth are statistically significant


Findings

Findings

  • Liquidity Spillovers: US and Euro area

    • Same economic standing ≈same monetary policies

  • ASEAN 5: autonomous from excess international liquidity

    • Emerging Market

  • US domestic excess liquidity insignificant


Conclusion

Conclusion

  • Local excess liquidity

    • Euro and ASEAN 5 : consistent with expectations

    • US market: why?

  • Spillover effects

    • Euro area and US market: reciprocal effects

    • ASEAN 5: no spillover effect


End of presentation

END OF PRESENTATION


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