Global Liquidity and Exchange Market Pressure in Emerging Market Economies

42 Pages Posted: 24 Apr 2018

See all articles by Oliver Hossfeld

Oliver Hossfeld

Deutsche Bundesbank

Marcus Pramor

Deutsche Bundesbank; Center for Financial Studies

Date Written: 2018

Abstract

We analyse the relationship between global liquidity and exchange market pressure in 32 emerging market economies. Exchange market pressure is a measure of excess currency demand that is applicable across different exchange rate regimes as it accounts for changes in exchange rates, foreign exchange reserves and, optionally, interest rates. Surges in monetary liquidity, credit provision, and short-term funding in advanced economies are shown to be robustly associated with appreciation pressure on emerging market currencies. The underlying transmission mechanism, however, only operates under regular financial market conditions: ample liquidity provision in advanced economies contributes to the build-up of financial stability risks in emerging market economies in tranquil times, but further liquidity injections do not avert the pronounced depreciation pressure on emerging market currencies in times of high market volatility.

Keywords: global liquidity, emerging markets, exchange market pressure, search for yield, global financial cycle

JEL Classification: F31, E51, E58, C23

Suggested Citation

Hossfeld, Oliver and Pramor, Marcus, Global Liquidity and Exchange Market Pressure in Emerging Market Economies (2018). Deutsche Bundesbank Discussion Paper No. 05/2018. Available at SSRN: https://ssrn.com/abstract=3167789

Oliver Hossfeld (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Marcus Pramor

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Center for Financial Studies ( email )

Mertonstr. 17
Frankfurt, 60325
Germany

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