“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 M1 US M1 Euro M1 ASEAN sum M1 ASEAN 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 US Excess M1 Euro Excess M1 ASEANsum Excess M1 ASEANwt 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 %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)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 Money growths of the three markets are not statistically significant VariableCoeff.t-Stat. Constant US M1 growth ASEAN M1 growth Euro area M1 growth Velocity R2R ADJ. R

Euro Area Real Market Return Euro area money growth is significant VariableCoeff.t-Stat. Constant US M1 growth ASEAN M1 growth Euro area M1 growth Velocity R2R ADJ. R

ASEAN 5 Real Market Return ASEAN 5 money growth is significant VariableCoeff.t-Stat. Constant US M1 growth ASEAN M1 growth Euro area M1 growth Velocity R2R ADJ. R

US Real Market Return VariableCoeff.t-Stat. Constant Mkt. Ret. (-1) US XCS M Real GDP CPI Velocity Real ST rate Euro XCS M Euro XCS M1(-1) Euro XCS M1(-2) ASEAN XCS M ASEAN XCS M1(-1) ASEAN XCS M1(-2) R2R ADJ. R Inflation is statistically significant Money velocity remains significant Evidence of a push channel from Euro area to the US

Euro Area Real Market Return VariableCoeff.t-Stat. Constant Mkt. Ret. (-1) Euro XCS M Real GDP CPI Velocity Real ST rate US XCS M US XCS M1(-1) US XCS M1(-2) ASEAN XCS M ASEAN XCS M1(-1) ASEAN XCS M1(-2) R2R ADJ. R 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 VariableCoeff.t-Stat. Constant Mkt. Ret. (-1) Asean XCS M Real GDP CPI Velocity Real ST rate US XCS M US XCS M1(-1) US XCS M1(-2) Euro XCS M Euro XCS M1(-1) Euro XCS M1(-2) R2R ADJ. R 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