International liquidity

Abstract

: Global or international liquidity has moved to centre stage in recent international policy, research and market discussions. Contrary to the approach of major international organisations, which focus particularly on cross-border credit, this paper discusses five dimensions of international liquidity that are all of interest to central banks and should be subject to appropriate surveillance. It describes how they have evolved before, during and after the financial crisis. No general shortage of liquidity is found for the recent past and diverse developments can be explained, in part, by a small number of factors. The paper also raises salient policy issues related to these international liquidity developments. For example, financial regulation needs to be designed in a way that preserves incentives for market-making in major international assets. Data need to be made available for properly analysing to which extent global collateral re-use “lubricates” the financial system and to which extent it may act as a conduit for contagion. Ways need to be found how soaring corporate cash hoarding can be brought back into real investment. International spillovers of unconventional monetary policies suggest revisiting the current consensus on international monetary policy coordination. As the economic recovery in advanced economies strengthens consolidating public finances may be a more sustainable approach to re-increasing the availability of liquid and safe international assets than the further issuance of sovereign bonds by large countries that have already high levels of debt.