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Global liquidity - concept, measurement and policy implications


  • Bank for International Settlements


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.

Suggested Citation

  • Bank for International Settlements, 2011. "Global liquidity - concept, measurement and policy implications," CGFS Papers, Bank for International Settlements, number 45.
  • Handle: RePEc:bis:biscgf:45

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    References listed on IDEAS

    1. Rebeca Anguren Martín, 2011. "Credit cycles: Evidence based on a non linear model for developed countries," Working Papers 1113, Banco de España;Working Papers Homepage.
    2. Yener Altunbas & Leonardo Gambacorta & David Marques-Ibanez, 2010. "Does monetary policy affect bank risk-taking?," BIS Working Papers 298, Bank for International Settlements.
    3. Ingo Fender & Patrick McGuire, 2010. "European banks' US dollar funding pressures," BIS Quarterly Review, Bank for International Settlements, June.
    4. Bussiere, Matthieu & Fratzscher, Marcel, 2006. "Towards a new early warning system of financial crises," Journal of International Money and Finance, Elsevier, vol. 25(6), pages 953-973, October.
    5. Detken, Carsten & Alessi, Lucia, 2009. "'Real time'early warning indicators for costly asset price boom/bust cycles: a role for global liquidity," Working Paper Series 1039, European Central Bank.
    6. Tobias Adrian & Hyun Song Shin, 2014. "Procyclical Leverage and Value-at-Risk," Review of Financial Studies, Society for Financial Studies, vol. 27(2), pages 373-403.
    7. Klaas Baks & Charles Frederick Kramer, 1999. "Global Liquidity and Asset Prices; Measurement, Implications, and Spillovers," IMF Working Papers 99/168, International Monetary Fund.
    8. Vinogradov, Dmitri, 2012. "Destructive effects of constructive ambiguity in risky times," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1459-1481.
    9. Claudio Borio & Robert McCauley & Patrick McGuire, 2011. "Global credit and domestic credit booms," BIS Quarterly Review, Bank for International Settlements, September.
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    Cited by:

    1. Cavoli, Tony & Rajan, Ramkishen S., 2015. "Capital inflows and the interest premium problem: The effects of monetary sterilisation in selected Asian economies," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 1-18.
    2. Avdjiev, Stefan & Gambacorta, Leonardo & Goldberg, Linda S. & Schiaffi, Stefano, 2017. "The shifting drivers of global liquidity," Staff Reports 819, Federal Reserve Bank of New York.

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