“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

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%

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%

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)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

• 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 + 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 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

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

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

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

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

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

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

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

END OF PRESENTATION