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Global liquidity - concept, measurement and policy implications

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  • Bank for International Settlements
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    Abstract

    Global liquidity has become a key focus of international policy debates over recent years. This reflects the view that global liquidity and its drivers are of major importance for international financial stability. The concept of global liquidity, however continues to be used in a variety of ways and this ambiguity can lead to unfounded and potentially destabilising policy initiatives. This report analyses global liquidity from a financial stability perspective, using two distinct liquidity concepts. One is official liquidity, which can be used to settle claims through monetary authorities and is ultimately provided by central banks. The other concept is private (or private sector) liquidity, which is created to a large degree through cross-border operations of banks and other financial institutions. Understanding the determinants of private liquidity is of particular importance. As many financial institutions provide liquidity both domestically and in other countries, globally, private liquidity is linked to the dynamics of gross international capital flows, including cross-border banking or portfolio movements. This international component of liquidity can be a potential source of instability because of its own dynamics or because it amplifies cyclical movements in domestic financial conditions and intensifies domestic imbalances. Policy responses to global liquidity call for a consistent framework that considers all phases of global liquidity cycles, countering both surges and shortages. Measures to prevent unsustainable booms in private liquidity are linked with micro- and macroprudential policies as well as the financial reform agenda. Country-specific or regional liquidity shocks, in turn, may effectively be addressed through self-insurance in the form of precautionary foreign exchange reserves holdings and existing arrangements which essentially redistribute liquidity. However, truly global liquidity shocks necessitate direct interventions in amounts large enough to break downward liquidity spirals. Only central banks have this ability.

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    Bibliographic Info

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    This book is provided by Bank for International Settlements in its series CGFS Papers with number 45 and published in 2011.

    ISBN: 92-9131-894-9
    Handle: RePEc:bis:biscgf:45

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    1. Yener Altunbas & Leonardo Gambacorta & David Marques-Ibanez, 2010. "Does monetary policy affect bank risk-taking?," BIS Working Papers, Bank for International Settlements 298, Bank for International Settlements.
    2. Claudio Borio & Robert McCauley & Patrick McGuire, 2011. "Global credit and domestic credit booms," BIS Quarterly Review, Bank for International Settlements, Bank for International Settlements, September.
    3. Bussière, Matthieu & Fratzscher, Marcel, 2002. "Towards a new early warning system of financial crises," Working Paper Series, European Central Bank 0145, European Central Bank.
    4. Klaas Baks & Charles Frederick Kramer, 1999. "Global Liquidity and Asset Prices," IMF Working Papers, International Monetary Fund 99/168, International Monetary Fund.
    5. Tobias Adrian & Hyun Song Shin, 2013. "Procyclical Leverage and Value-at-Risk," NBER Working Papers 18943, National Bureau of Economic Research, Inc.
    6. Rebeca Anguren Martín, 2011. "Credit cycles: Evidence based on a non linear model for developed countries," Banco de Espa�a Working Papers, Banco de Espa�a 1113, Banco de Espa�a.
    7. Alessi, Lucia & Detken, Carsten, 2009. "'Real time'early warning indicators for costly asset price boom/bust cycles: a role for global liquidity," Working Paper Series, European Central Bank 1039, European Central Bank.
    8. Ingo Fender & Patrick McGuire, 2010. "European banks' US dollar funding pressures," BIS Quarterly Review, Bank for International Settlements, Bank for International Settlements, June.
    9. Vinogradov, Dmitri, 2012. "Destructive effects of constructive ambiguity in risky times," Journal of International Money and Finance, Elsevier, Elsevier, vol. 31(6), pages 1459-1481.
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