Oliver Hossfeld, Marcus Pramor

• Research Question While there is ample empirical evidence suggesting that capital flows between advanced and emerging market economies are strongly affected by global factors such as liquidity conditions in advanced economies, evidence on the impact of global liquidity on emerging market currencies is scarce. Exchange rate analyses are impeded by the fact that most emerging market countries have not maintained fully flexible exchange rates over recent decades but intervened, at least temporarily, in the foreign exchange market. Contribution We account for the lack of exchange rate flexibility by analysing the impact of global liquidity on exchange market pressure, a concept that allows us to gauge the response of emerging market currencies to changes in global liquidity even in the presence of foreign exchange interventions. A panel data analysis is conducted based on 32 emerging market economies for a sample period from 1995 to 2015, thereby capturing different stages of the global financial cycle. Results Increases in global liquidity are robustly related to appreciation pressure on emerging market currencies, based on a large set of liquidity indicators and allowing for different definitions of exchange market pressure. The impact is restricted to periods of comparatively low stress in financial markets, however. In times of high volatility, when emerging market economies often face abrupt and pronounced currency depreciations, this effect vanishes. Our results imply that ample liquidity provision in advanced economies may contribute to a build-up of financial stability risks in emerging market economies during tranquil periods, while further liquidity injections will not immediately alleviate depreciation pressure on emerging market currencies in times of crisis.