This paper distills and identifies global liquidity (GL) momenta from the macro-financial
data of advanced economies through a factor model with sign restrictions as policy-driven,
market-driven, and risk averseness factors. Using a panel factor-augmented VAR, we
investigate responses of emerging market economies (EMEs) to GL shocks. A policy-driven
liquidity increase boosts growth in EMEs, elevating stock prices and currency values, while a
risk averseness rise has an opposite effect. A market-driven GL expansion boosts stock
markets and lowers funding costs, promoting competitiveness and current account. Inflation
targeting EMEs fare better than EMEs under alternative regimes with respect to macrofinancial
volatility.
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