The Excess Liquidity of the Open Economy and its Management

Authors

Renmin University of China, China

Abstract

 The excess liquidity of the open economy has become one main factor influencing the monetary markets, financial markets and even the whole macroeconomic. In era of the post-crisis, many countries have implemented the loose monetary policies, especially the quantitative easing policy in the U.S. which worsened the situation of the excess liquidity. Under this background, it will be more meaningful to study the excess liquidity of the open economy and its management for the developing countries’ economic recovery and development, inflation control, economic structural adjustment and optimization and the stability of the social economy.   This paper starts by deep study of the related theories of the excess liquidity and the transmission mechanisms and then has an analysis on the current situation and cause of the excess liquidity in the BRICs which is taken as the representative for the developing countries. And then it comes up with the point that the main cause of the excess liquidity in the developing countries is the financial system, including loose monetary policies, financial innovation, petrodollar, East Asia dollar, US dollar hegemony, overcapacity, trade supply, savings supply and the surge of foreign exchange reserves etc. With the help of the Impulse response model from the VAR model, this paper analyzed on the impact of global liquidity surge to America, the euro zone, Japan, China, India, Russia, Brazil etc. and came to a conclusion: 1. The global excess liquidity keeps increasing. And its speed in the developing countries is fast while slow in the developed countries. 2. The spillover effect of the global excess liquidity spreads mainly through GDP and price. And for most countries, the international factor has more influence on the rising price than the domestic factor. Besides, the GDP has also been affected to fast grow which in turn becomes the main driving force of quantity increase of money. 3. The openness and development level of the economy is not the decisive factor in the excess liquidity’s spillover effect. However, the structure of the macroeconomics and the management level discrepancy are the root causes of the influence difference among countries. Last but not least, combining the new situation of the International economy and the current situation in developing countries, this paper raises some suggestions. JEL Classification: E31, G33

Keywords