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“INTERNATIONAL LIQUIDITY, MONETARY SPILLOVERS AND
ASSET PRICES”
Daniel Borja
&
Daniel Goyeau
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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
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Presentation Structure
• Introduction
• Liquidity Definition
• Methodology
• Results and Findings
• Conclusion
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Liquidity and Asset Prices
• Tenuous Link?
Effect of Financial Globalization
Greater Synchronization of Markets
Monetary Spillover
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What is Liquidity?
• Two Concepts of Liquidity, Baks and Kramer (1999)– Market Liquidity– Monetary Liquidity
• Money growth• Excess money growth
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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
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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
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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
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Liquidity Definition
• Problems with micro-based measures
• Problems with “asset-debt” ratio
• International Liquidity: EXCESS MONEY GROWTH
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Liquidity and Asset Prices
Excess Liquidity
| Increases Demand for a Fixed Supply of
Assets
|Asset Price Inflation
*Baks and Kramer (1999)
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Liquidity and Asset Prices
Improving Economic Prospects
Excess Liquidity Asset Price Inflation
*Baks and Kramer (1999)
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Liquidity and Asset Prices
Excess Liquidity
|Decrease in the Discount Rate
|Asset Price Inflation
*Baks and Kramer (1999)
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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
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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
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Data
• Growth rates
• Local currency into USD or euros
• ASEAN 5 DATA– Simple Sum– Weighted Growth Series
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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
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Money Growth Rates
M1US
M1Euro
M1ASEAN
sum
M1ASEAN
wt
Mean 0.51% 2.14% 1.38% 1.89%
Median 0.49% 1.33% 2.31% 2.17%
Max. 5% 10.25% 16.42% 19%
Min. -3.93% -5.92% -18.43% -18.65%
Std. Dev. 1.79% 3.77% 6.29% 6.82%
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Excess Money Growth Rates
Excess M1
USExcess M1
EuroExcess M1ASEANsum
Excess M1ASEANwt
Mean -0.77% 1% 0.30% 0.40%
Median -0.53% 2.15% 0.39% -0.15%
Max. 8.04% 14.76% 14.25% 16.37%
Min. -6.28% -14.99% -13.72% -12.04%
Std. Dev. 2.89 6.43% 5.09% 4.94%
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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
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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
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Velocity of Money
• Ratio of nominal GDP and broad money(M3)
• Significant change in money velocity in the three areas during this period
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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
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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
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US Real Market Return
• Money growths of the three markets are not statistically significant
Variable Coeff. t-Stat.
Constant -0.334 -1.953
US M1 growth
-0.006 -0.007
ASEAN M1 growth
0.262 1.244
Euro area M1 growth
0.039 0.165
Velocity 0.245 2.092
R2 0.147
ADJ. R2 0.044
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Euro Area Real Market Return
• Euro area money growth is significant
Variable Coeff. t-Stat.
Constant 0.185 0.414
US M1 growth
0.456 0.789
ASEAN M1 growth
0.573 1.602
Euro area M1 growth
2.475 3.155
Velocity -0.202 -0.594
R2 0.540
ADJ. R2 0.448
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ASEAN 5 Real Market Return
• ASEAN 5 money growth is significant
Variable Coeff. t-Stat.
Constant 0.388 1.119
US M1 growth
-1.887 -1.270
ASEAN M1 growth
2.362 6.041
Euro area M1 growth
0.119 0.278
Velocity -0.379 -1.244
R2 0.566
ADJ. R2 0.514
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US Real Market Return
Variable Coeff. t-Stat.
Constant -0.452 -1.868
Mkt. Ret.(-1) 0.062 0.336
US XCS M1 0.238 0.381
Real GDP 0.047 0.139
CPI -9.310 -2.372
Velocity 0.376 2.051
Real ST rate -1.069 -0.837
Euro XCS M1 -0.203 -0.596
Euro XCS M1(-1) -0.038 -0.084
Euro XCS M1(-2) 0.894 2.430
ASEAN XCS M1 0.365 1.217
ASEAN XCS M1(-1) 0.497 1.672
ASEAN XCS M1(-2) -0.148 -0.509
R2 0.639
ADJ. R2 0.442
•Inflation is statistically significant
•Money velocity remains significant
•Evidence of a push channel from Euro area to the US
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Euro Area Real Market Return
Variable Coeff. t-Stat.
Constant -0.178 -0.256
Mkt. Ret.(-1) 0.327 0.902
Euro XCS M1 4.450 2.806
Real GDP 4.413 2.643
CPI 0.525 0.072
Velocity 0.076 0.130
Real ST rate -0.678 -0.126
US XCS M1 -0.001 -0.001
US XCS M1(-1) 2.000 1.934
US XCS M1(-2) -0.876 -0.679
ASEAN XCS M1 0.858 1.036
ASEAN XCS M1(-1) 0.160 0.155
ASEAN XCS M1(-2) 0.246 0.355
R2 0.716
ADJ. R2 0.407
•Real GDP growth and Euro area excess M1 growth are statistically significant
•Spillover: Push of money from US to the Euro area
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ASEAN 5 Real Market Return
Variable Coeff. t-Stat.
Constant 0.441 0.855
Mkt. Ret.(-1) -0.300 -1.992
Asean XCS M1 2.775 3.449
Real GDP 2.411 3.030
CPI 2.561 0.706
Velocity -0.431 -0.970
Real ST rate 0.968 0.840
US XCS M1 -0.502 -0.377
US XCS M1(-1) 1.226 0.852
US XCS M1(-2) 0.181 0.143
Euro XCS M1 -0.239 -0.260
Euro XCS M1(-1) -0.924 -0.882
Euro XCS M1(-2) 0.117 0.132
R2 0.653
ADJ. R2 0.464
•Real GDP growth and ASEAN 5 excess M1 growth are statistically significant
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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
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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
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END OF PRESENTATION