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

Author

Listed:
  • Chau Le

    (University of Lincoln
    University of Economics Ho Chi Minh City)

  • Huyen Nguyen

    (Ho Chi Minh University of Banking)

  • Duc Vo

    (The University of Western Australia
    Ho Chi Minh City Open University)

Abstract

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.

Suggested Citation

  • Chau Le & Huyen Nguyen & Duc Vo, 2024. "Global liquidity spillovers in the Asia–Pacific region: policy-driven versus market-driven effects," Empirical Economics, Springer, vol. 67(3), pages 1091-1113, September.
    • Handle: RePEc:spr:empeco:v:67:y:2024:i:3:d:10.1007_s00181-024-02573-4
    DOI: 10.1007/s00181-024-02573-4
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    More about this item

    Keywords

    Global liquidity; Spillover effect; Monetary policy; Transmission mechanism; Asia–Pacific region;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F3 - International Economics - - International Finance
    • F6 - International Economics - - Economic Impacts of Globalization

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