Exploring the Dynamics of Global Liquidity

Abstract

This paper explores the concept of global liquidity, its measurement and macro-financial importance. We construct two sets of indicators for global liquidity: a quantity series distinguishing between core and noncore liabilities of financial intermediatires and a corresponding price series. Using price and quantity indicators simultaneously, it is possible to distinguish between shocks to the supply and demand for global liquidity, and isolate their impact on the economy. Our results confirm that global liquidity conditions matter for economic and financial stability, and points to indicators whose regular monitoring could be valuable to policymakers.

Understanding global liquidity

“…Similar restrictions have been used in previous empirical work to identify credit supply shocks (Helbling et al (2011), Busch et al (2010), Peersman (2010, Hristov et al (2012), Bean et al (2010), Meeks (2011), De Nicoló andLucchetta (2010), Eickmeier and Ng (2011)). Another example is Chen et al (2012) who use sign restrictions similar to ours in a small scale VAR to identify supply and demand shocks to banks'core and non-core liabilities and assess their macroeconomic e¤ects at the global and individual country level. 1 7 For a more detailed discussion of the determinants of credit demand, see Hofmann (2004) who also presents cross-country evidence showing that credit demand is negatively linked to short-term interest rates and positively linked to economic activity and property prices.…”

Capital Flows and the Risk-Taking Channel of Monetary Policy

“…Bruno and Shin (2012) has verified the role of global factors associated with the leverage of the banking sector as being a key determinant of cross-border capital flows in panel regressions of capital flows to emerging and 38 advanced economies. Eickmeier, Gambacorta and Hofmann (2013) and Chen et al (2012) are two papers in a recent literature that has attempted to elucidate the concept of "global liquidity"…”

Global Liquidity and Commodity Prices

“…On the asset side of financial institutions’ balance sheet, the Committee on the Global Financial System (CGFS) considers global liquidity as the sum of domestic credit and cross‐border credit (CGFS, ). On the liabilities side, Chen et al () suggest ‘core’ liquidity as residents’ deposits in commercial banks and ‘noncore’ liquidity as cross‐border deposits, loans and securities in commercial banks’ liabilities. Despite their popularity and simplicity, the quantity indicators have a crucial drawback: they tend to move very slowly in response to changes in market expectation.…”

“…Note that the refined measures such as CGFS (2011) and Chen et al () are not viable, since the frequency of VAR is monthly but these indicators are based on quarterly data such as the Bank for International Settlement (BIS) international banking statistics and flow of funds data in each country. Instead, Kang and Lee () show that the quantity measures suggested above are highly correlated in terms of growth rates and cycle components extracted from the statistical filters.…”