The Impact of Global Liquidity on Developing Countries

The Impact of Global Liquidity on Developing Countries

Erhan Genç (Usak University, Turkey) and Mustafa Karabacak (Usak University, Turkey)
DOI: 10.4018/978-1-5225-2245-4.ch016
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Global liquidity has become a focal point of international political discussions in recent years. Increasing international financial asset transactions and expansionary monetary policies, which central banks of developed countries adopt, generate excess liquidity around the world. Today with the increasing capital mobilization excess global liquidity becomes effective on the national economies and monetary policies of developing countries as well. It is seen that increasing risk appetite, especially after 2008 global crisis, causes a flow of global liquidity from developed countries to developing countries. The so-called liquidity may be effective on monetary policy stability, financial stability and growth performances. In other words; the increasing global liquidity may have both positive and negative influences on national economies. In this context; in this study, the effects of global liquidity on national economies is analyzed by using the measures of global liquidity and causality tests.
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Socio-cultural, economic and military independences with financial liberalization and integration studies occurring thanks to technological improvements worldwide have made the fact of globalization one of the most important concepts for each term. Globalization is considered as a single concept; however, it embodies many sociological, economic, political and demographic facts. Although globalization process has not affected all countries at the same level, globalization has led a dramatic change in cultural, social and economic interactions all over the world and created new opportunities and new ideas. Being the economic aspect of globalization and significant to many countries today, global liquidity constitutes one of the economic aspects of globalization. The increase of international financial asset transactions and expansionary monetary policies, which central banks of developed countries adopt, generate excess liquidity around the World. Today, in a World of high capital mobility, the global excess liquidity, emerging as a result of expansionary monetary policies of developed countries affects the developing economies and their monetary policies as well.

One of the most significant and current discussions in international finance is Global liquidity. Global liquidity is a complex concept which has no distinct definition. In broad terms, global liquidity indicates state of the funds which are already available to be utilized for the procurement of goods and financial assets. Global liquidity can be treated under two headings: Global monetary liquidity and global financial market liquidity. Monetary liquidity expresses the level of convertibility of monetary assets. Liquidity of monetary assets rise while converting monetary assets into goods and also services gets easier. On the other hand, the term market liquidity refers to cost of converting financial assets into money (ECB, 2012:55-56). Worldwide interest rates, asset prices, risk appetite of investors, international investments and capital flows are in the characteristics of indicators of the global liquidity concept.

Having great importance to countries’ economies, global liquidity has found a large expansion area especially since the beginning of 2003. Upon the global financial crisis, occurred in the second half of 2007, US economy and other developed countries have begun to reduce interest rates aggressively in the scope of traditional understanding of the monetary policy framework. On the other hand, the countries with less risky economies have made no changes in interest rates; on the contrary, they have increased these interest rates in response to rising commodity prices. Nevertheless, debt sustainability problems arising in Eurozone and nearby countries have led central banks of developed countries to initiate a quantitative easing process. Quantitative easing policy led extremely low policy rates and widespread rise in risk appetite. The spillover effects of these unusual monetary policies on emerging markets show up as widened international funding conditions and extraordinary rise in gross capital flows. This process has brought an abundant liquidity and capital flow through developing countries and enabled them to have an upward trend. This excessive liquidity brings along the financial instability in emerging market economies (Feyen, et. al. 2015:2).

Global liquidity expansion has had both positive and negatives effects in terms of stability of financial markets. The positive ones are absorbing the effects of market shocks, reducing the transition of these shocks between the sectors, promoting the depth and efficiency of financial markets and contributing to market transformations which are needed to ensure the financial stability. On the other hand, negative ones can be listed as exposing the market by creating adverse effect in response to great shocks and creating exchange rate fragility and booms in the price of financial commodities due to liquidity surplus (Browne and McKiernan, 2005: 84-86).

Today, introduction of global liquidity particularly into the developing countries’ economies makes the investigation of effects of global liquidity on developing countries important. In this respect, the relation of causality between various global liquidity parameters and selected macroeconomic indicators of developing countries has been investigated in the present study.

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