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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 36, No. 2, pp.193-220
ISSN: 1225-0279 (Print)
Print publication date 31 May 2023
Received 16 Jan 2023 Revised 31 Jan 2023 Accepted 21 Apr 2023
DOI: https://doi.org/10.22904/sje.2023.36.2.002

The Role of Global Liquidity in Global Yield Dynamics

Euihwan Park ; Dong Heon Kim
Euihwhan Park, Assistant Professor, Department of Economics, Hannam University, DaeJeon eh_park@hnu.kr
Dong Heon Kim, Corresponding Author, Professor, Department of Economics, Korea University, Seoul, Tel: +82-2-3290-2226 dongkim@korea.ac.kr

JEL Classification: E4; C5; G1; F4

Abstract

With the emergence of global liquidity as an important factor in the global financial market since the global financial crisis in 2008, the global financial market has shown interest in the effect of global liquidity on global yield dynamics. This paper examines the role of global liquidity in global yield dynamics based on the macro-finance model. Estimation results show that the global liquidity plays a more important role in explaining the global level factor than global inflation, but such macro factors do not seem to explain the global slope factor. We interpret that global liquidity not only has information on global commodity inflation but also on global asset price inflation and future expected inflation and thus has more explanatory power than global inflation.

Keywords:

Term structure, Global liquidity, Dynamic factor model, Global yield, Yield curve

Acknowledgments

Part of this paper is based on Euihwan Park’s Ph.D. dissertation (2019) at Korea University. We thank Taiyo Yoshimi and the participants in the 2022 Japanese Society of International Economics Conference for their constructive comments and suggestions. Dong Heon Kim also thanks the Korea University research grant.

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