1. “INTERNATIONAL LIQUIDITY, MONETARY SPILLOVERS AND ASSET PRICES” Daniel Borja & Daniel Goyeau

2. 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

3. Presentation Structure Introduction Liquidity Definition Methodology Results and Findings Conclusion

4. Liquidity and Asset Prices Tenuous Link? Effect of Financial Globalization  Greater Synchronization of Markets  Monetary Spillover

5. What is Liquidity? Two Concepts of Liquidity, Baks and Kramer (1999) –Market Liquidity –Monetary Liquidity Money growth Excess money growth

6. 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

7. 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

8. 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

9. Liquidity Definition Problems with micro-based measures Problems with “asset-debt” ratio International Liquidity: EXCESS MONEY GROWTH

10.  Liquidity and Asset Prices  Excess Liquidity |  Increases Demand for a Fixed Supply of Assets |  Asset Price Inflation *Baks and Kramer (1999)

11.  Liquidity and Asset Prices Improving Economic Prospects Excess Liquidity Asset Price Inflation *Baks and Kramer (1999)

12.  Liquidity and Asset Prices  Excess Liquidity |  Decrease in the Discount Rate |  Asset Price Inflation *Baks and Kramer (1999)

13. 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

14. 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

15. Data Growth rates Local currency into USD or euros ASEAN 5 DATA –Simple Sum –Weighted Growth Series

16. 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

17. 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%

18. 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. 2.896.43%5.09%4.94%

19. 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

20. 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

21. Velocity of Money Ratio of nominal GDP and broad money(M3) Significant change in money velocity in the three areas during this period

22. 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

23. 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

24. US Real Market Return Money growths of the three markets are not statistically significant VariableCoeff.t-Stat. Constant-0.334-1.953 US M1 growth -0.006-0.007 ASEAN M1 growth 0.2621.244 Euro area M1 growth 0.0390.165 Velocity0.2452.092 R2R2 0.147 ADJ. R 2 0.044

25. Euro Area Real Market Return Euro area money growth is significant VariableCoeff.t-Stat. Constant0.1850.414 US M1 growth 0.4560.789 ASEAN M1 growth 0.5731.602 Euro area M1 growth 2.4753.155 Velocity-0.202-0.594 R2R2 0.540 ADJ. R 2 0.448

26. ASEAN 5 Real Market Return ASEAN 5 money growth is significant VariableCoeff.t-Stat. Constant0.3881.119 US M1 growth -1.887-1.270 ASEAN M1 growth 2.3626.041 Euro area M1 growth 0.1190.278 Velocity-0.379-1.244 R2R2 0.566 ADJ. R 2 0.514

27. US Real Market Return VariableCoeff.t-Stat. Constant-0.452-1.868 Mkt. Ret. (-1) 0.0620.336 US XCS M10.2380.381 Real GDP0.0470.139 CPI-9.310-2.372 Velocity0.3762.051 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)0.8942.430 ASEAN XCS M10.3651.217 ASEAN XCS M1(-1)0.4971.672 ASEAN XCS M1(-2)-0.148-0.509 R2R2 0.639 ADJ. R 2 0.442 Inflation is statistically significant Money velocity remains significant Evidence of a push channel from Euro area to the US

28. Euro Area Real Market Return VariableCoeff.t-Stat. Constant-0.178-0.256 Mkt. Ret. (-1) 0.3270.902 Euro XCS M14.4502.806 Real GDP4.4132.643 CPI0.5250.072 Velocity0.0760.130 Real ST rate-0.678-0.126 US XCS M1-0.001 US XCS M1(-1)2.0001.934 US XCS M1(-2)-0.876-0.679 ASEAN XCS M10.8581.036 ASEAN XCS M1(-1)0.1600.155 ASEAN XCS M1(-2)0.2460.355 R2R2 0.716 ADJ. R 2 0.407 Real GDP growth and Euro area excess M1 growth are statistically significant Spillover: Push of money from US to the Euro area

29. ASEAN 5 Real Market Return VariableCoeff.t-Stat. Constant0.4410.855 Mkt. Ret. (-1) -0.300-1.992 Asean XCS M12.7753.449 Real GDP2.4113.030 CPI2.5610.706 Velocity-0.431-0.970 Real ST rate0.9680.840 US XCS M1-0.502-0.377 US XCS M1(-1)1.2260.852 US XCS M1(-2)0.1810.143 Euro XCS M1-0.239-0.260 Euro XCS M1(-1)-0.924-0.882 Euro XCS M1(-2)0.1170.132 R2R2 0.653 ADJ. R 2 0.464 Real GDP growth and ASEAN 5 excess M1 growth are statistically significant

30. 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

31. 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

32. END OF PRESENTATION