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Global Liquidity: Availability of Funds for Safe and Risky Assets

Author/Editor: Matsumoto, Akito
Authorized for Distribution: June 1, 2011
Electronic Access: Free Full Text (PDF file size is 1,037KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: What is global liquidity and how does it affect an economy? The paper addresses that question by looking at liquidity from two different perspectives: global liquidity as availability of funds in safe and risky asset markets. This distinction between safe and risky asset markets is important due to market segmentation, which called for unconventional monetary policy to restore a function of risky asset markets. To analyze the effect of global liquidity, I construct proxy variables and then asses how they affect an emerging economy whose interest rate is affected by a world risk-free rate and a risk premium. Using the data from four major Latin American countries, I find that these two aspects of global liquidity have similar effects on economic performance in emerging market economies except for their effect on inflation.
 
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Series: Working Paper No. 11/136
Subject(s): Asset prices | Cross country analysis | Economic models | Emerging markets | External shocks | Financial risk | Investment | Latin America | Liquidity | Risk premium
Author's keyword(s): Global liquidity; risk premium; world risk-free rate; unconventional monetary policy; Latin America
 
English  
    Published:   June 1, 2011        
            Format:   Paper
    Stock No:   WPIEA2011136   Pages:   36
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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