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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 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%

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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%

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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)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

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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 + 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

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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 VariableCoeff.t-Stat. Constant US M1 growth ASEAN M1 growth Euro area M1 growth Velocity R2R ADJ. R

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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

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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

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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

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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

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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

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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

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