The Macroeconomic Effects of Global Liquidity : A Global VAR Approach

The global liquidity shock induced by the COVID-19 pandemic raises renewed concern about its impact on the economy. We examine the macroeconomic effect of global liquidity using the Global Vector Autoregression model with the quarterly dataset involving 33 countries. The main empirical results show varying impacts across countries and over different time horizons. The general spillover effect on real GDP is insignificant or negative in the short term but turns positive in the long term, while the significant effect on inflation rate normally appears within one year after the global liquidity shock. The short-term interest rate is adjusted accordingly in some countries. Moreover, official reserve assets transmit global liquidity spillovers to the exchange rate and real equity prices. Besides, compared with developed economies, the impulse responses in emerging economies are generally stronger except for the case of the exchange rate which depends more on the exchange rate regime