Working Paper: CEPR ID: DP10314
Authors: Eugenio Cerutti; Stijn Claessens; Lev Ratnovski
Abstract: This paper studies the determinants of global liquidity using data on cross-border bank flows, with a longer time series and broader country sample than previous studies. We define global liquidity as non-price determinants of cross-border credit supply, consistent with its meaning as the ?ease of financing? in international financial markets. We find that global liquidity is driven primarily by uncertainty (VIX), US monetary policy (term premia), and UK and Euro Area bank conditions (proxied by leverage and TED spreads). This expands on previous studies by highlighting non-US drivers of global liquidity, and is consistent with the dominant role of European banks in cross-border lending. We also show that borrowing countries can limit their exposures to global liquidity fluctuations through adapting their macro frameworks, capital flow management tools, and bank regulation.
Keywords: capital flows; global liquidity; international banking
JEL Codes: F21; F34; G15; G18; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| VIX (C58) | global liquidity (F65) |
| US monetary policy (term premia) (E43) | global liquidity (F65) |
| UK and Euro area banking conditions (leverage and TED spreads) (F65) | global liquidity (F65) |
| global liquidity (F65) | cross-border bank flows (F65) |
| increased uncertainty (VIX) (D89) | decreased cross-border flows (F32) |
| better banking conditions (G21) | increased cross-border flows (F29) |
| domestic policy adaptations (J18) | reduced vulnerability to global liquidity fluctuations (F65) |