Global liquidity indicators

While the trade channel indicates that an exchange rate depreciation will stimulate domestic economic activity, the financial channel can have the opposite effect. When banks and non-banks have foreign currency liabilities, an exchange rate depreciation has valuation effects that can lead to a tightening in domestic financial conditions. Using trade-weighted exchange rates and ...

Updated data suggest that global liquidity conditions may have begun to tighten for emerging economies. BIS General Manager Jaime Caruana said that shifting global financial conditions, along with maturing financial cycles in many emerging economies, were helping to drive disappointing economic growth, large shifts in exchange rates and sharp falls in commodity prices. These should not be seen as one-off shocks or headwinds but as an opportunity to move the global economy onto a more sustainable growth path.

We profile the US dollar debt incurred by borrowers in a dozen prominent emerging market economies (EMEs). These countries account for the bulk of total US dollar debt owed by EMEs. We measure the dollar borrowing of non-banks resident in these economies as well as that of their affiliates offshore, and relate these items to commonly used debt measures. We also discuss the limitations of our data. These data fail to ...

Banks and bond investors have extended $9 trillion of US dollar credit to non-bank borrowers outside the United States. This has relevance for the discussion of global liquidity and global monetary policy transmission. This paper contributes to this policy discussion by analysing the links between US monetary policy, including unconventional monetary policy, leverage and flows into bond funds, on the one hand, and dollar credit extended to non-US borrowers, on the other. We find that prior to the crisis, banks drew on low funding rates and low-cost leverage to extend dollar credit to non-US orrowers. After the Federal Reserve announced its large-scale bond purchases in 2008, however, bond investors responded to compressed long-term rates by buying dollar bonds from non-US borrowers. The balance of dollar credit transmission has shifted from global banks to global bond investors.

These remarks apply the concepts of global liquidity and the financial cycle to analyse developments in the global financial system in the past decade or so and to understand the current configuration of risks and vulnerabilities. The focus is on how financial risk-taking, asset prices and credit expansion tend to move together across countries, even when these countries are at different stages of the macroeconomic business cycle. After the boom in the early 2000s and the bust in the crisis period 2007-09, the world is now in a new phase of global liquidity - with potential new risks. Although global liquidity conditions remain accommodative at the current juncture, more normal conditions will inevitably return at some point. Both policymakers and the private sector will need to be prepared for that adjustment. This means watching out for vulnerabilities that may have built up while conditions were accommodative. It also means taking action to build resilience in the financial system.

Global liquidity has become a key focus of international policy debates over recent years. The concept of global liquidity, however continues to be used in a variety of ways and this ambiguity can lead to potentially undesirable policy responses. This feature attempts to further the understanding of the global liquidity concept, its measurement and policy implications. It argues that policy responses to global liquidity call for a consistent framework that considers all phases of global liquidity cycles, countering both surges and shortages.

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.

US dollar credit is growing quickly outside the United States, especially in Asia, and in some economies it has outpaced overall credit growth. Cross-border sources of credit bear watching in view of their record of outgrowing overall credit in credit booms. Foreign currency and cross-border sources of credit raise policy issues.