Transcript INTERNATIONAL LIQUIDITY, MONETARY SPILLOVERS AND …
“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 • ASEAN 5: No Spillover Effect
Presentation Structure
• Introduction • Liquidity Definition • Methodology • Results and Findings • Conclusion
Liquidity and Asset Prices
• Tenuous Link?
Effect of Financial Globalization Greater Synchronization of Markets Monetary Spillover
What is Liquidity?
• Two Concepts of Liquidity, Baks and Kramer (1999) – Market Liquidity – Monetary Liquidity • Money growth • Excess money growth
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 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 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
• Problems with micro-based measures • Problems with “asset-debt” ratio • International Liquidity: EXCESS MONEY GROWTH
Liquidity and Asset Prices
Excess Liquidity | Increases Demand for a Fixed Supply of Assets | Asset Price Inflation *Baks and Kramer (1999)
Liquidity and Asset Prices
Improving Economic Prospects
Excess Liquidity Asset Price Inflation *Baks and Kramer (1999)
Liquidity and Asset Prices
Excess Liquidity | Decrease in the Discount Rate | Asset Price Inflation *Baks and Kramer (1999)
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
• 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
Data
• Growth rates • Local currency into USD or euros • ASEAN 5 DATA – Simple Sum – Weighted Growth Series
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
Mean Median Max.
Min.
Std. Dev.
Money Growth Rates
M1 US
0.51% 0.49% 5% -3.93% 1.79%
M1 Euro
2.14%
M1 ASEAN sum
1.38%
M1 ASEAN wt
1.89% 1.33% 2.31% 2.17% 10.25% -5.92% 3.77% 16.42% -18.43% 6.29% 19% -18.65% 6.82%
Excess Money Growth Rates
Mean Median Max.
Min.
Std. Dev.
Excess M1 US Excess M1 Euro Excess M1 ASEANsum Excess M1 ASEANwt
-0.77% -0.53% 1% 2.15% 0.30% 0.39% 0.40% -0.15% 8.04% -6.28% 2.89
14.76% -14.99% 6.43% 14.25% -13.72% 5.09% 16.37% -12.04% 4.94%
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
R
i, t =
c + A(L)m
i, t
+ B(L)m
j, 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
• Ratio of nominal GDP and broad money(M3) • Significant change in money velocity in the three areas during this period
Monetary Spillover Regression
R
i, t =
c + aR
i, t-1
+ B(L)xm
i, t
+ C(L)r
i, t
+ D(L)y
i, t
+ E(L)p
i, t
+ F(L)v
i, t
+ G(L)xm
j, t
+ H(L)xm
k, t + ε i, t where:
R
i, t = real stock return
xm
i, t = excess money growth
r
i, t = real short-term rate
y
i, t = real gdp growth (USD)
p
i, t = inflation rate
v
i, t = velocity of money
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
Variable
Constant US M1 growth ASEAN M1 growth Euro area M1 growth Velocity R 2 ADJ. R 2
Coeff.
-0.334
-0.006
0.262
0.039
0.245
0.147
0.044
t-Stat.
-1.953
-0.007
1.244
0.165
2.092
• Money growths of the three markets are not statistically significant
Euro Area Real Market Return
Variable
Constant US M1 growth ASEAN M1 growth Euro area M1 growth Velocity R 2 ADJ. R 2
Coeff.
0.185
0.456
0.573
2.475
-0.202
0.540
0.448
t-Stat.
0.414
0.789
1.602
3.155
-0.594
• Euro area money growth is significant
ASEAN 5 Real Market Return
Variable
Constant US M1 growth ASEAN M1 growth Euro area M1 growth Velocity R 2 ADJ. R 2
Coeff.
0.388
-1.887
2.362
0.119
-0.379
0.566
0.514
t-Stat.
1.119
-1.270
6.041
0.278
-1.244
• ASEAN 5 money growth is significant
US Real Market Return
Variable
Constant Mkt. Ret.
(-1) US XCS M1 Real GDP CPI Velocity Real ST rate
Coeff.
-0.452
0.062
0.238
0.047
-9.310
0.376
-1.069
t-Stat.
-1.868
0.336
0.381
0.139
-2.372
2.051
-0.837
Euro XCS M1 Euro XCS M1(-1) Euro XCS M1(-2) ASEAN XCS M1 ASEAN XCS M1(-1) ASEAN XCS M1(-2) R 2 ADJ. R 2 •Inflation is statistically significant •Money velocity remains significant •Evidence of a push channel from Euro area to the US -0.203
-0.038
0.894
0.365
0.497
-0.148
0.639
0.442
-0.596
-0.084
2.430
1.217
1.672
-0.509
Euro Area Real Market Return
Variable
Constant Mkt. Ret.
(-1) Euro XCS M1 Real GDP CPI Velocity Real ST rate
Coeff.
-0.178
0.327
4.450
4.413
0.525
0.076
-0.678
t-Stat.
-0.256
0.902
2.806
2.643
0.072
0.130
-0.126
US XCS M1 US XCS M1(-1) US XCS M1(-2) ASEAN XCS M1 ASEAN XCS M1(-1) ASEAN XCS M1(-2) R 2 ADJ. R 2 -0.001
2.000
-0.876
0.858
0.160
0.246
0.716
0.407
-0.001
1.934
-0.679
1.036
0.155
0.355
•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 Return
Variable
Constant Mkt. Ret.
(-1) Asean XCS M1 Real GDP CPI Velocity Real ST rate
Coeff.
0.441
-0.300
2.775
2.411
2.561
-0.431
0.968
t-Stat.
0.855
-1.992
3.449
3.030
0.706
-0.970
0.840
US XCS M1 US XCS M1(-1) US XCS M1(-2) Euro XCS M1 Euro XCS M1(-1) Euro XCS M1(-2) R 2 ADJ. R 2 -0.502
1.226
0.181
-0.239
-0.924
0.117
0.653
0.464
-0.377
0.852
0.143
-0.260
-0.882
0.132
•Real GDP growth and ASEAN 5 excess M1 growth are statistically significant
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
• 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