Working Paper: NBER ID: w31355
Authors: Linda S. Goldberg
Abstract: Global liquidity refers to the volumes of financial flows – largely intermediated through global banks and non-bank financial institutions – that can move at relatively high frequencies across borders. The amplitude of responses to global conditions like risk sentiment, discussed in the context of the global financial cycle, depends on the characteristics and vulnerabilities of the institutions providing funding flows. Evidence from across empirical approaches and using granular data provides policy-relevant lessons. International spillovers of monetary policy and risk sentiment through global liquidity evolve in response to regulation, the characteristics of financial institutions, and actions of official institutions around liquidity provision. Strong prudential policies in the home countries of global banks and official facilities reduce funding strains during stress events. Country-specific policy challenges, summarized by the monetary and financial trilemmas, are partially alleviated. However, risk migration across types of financial intermediaries underscores the importance of advancing regulatory agendas related to non-bank financial institutions.
Keywords: global liquidity; financial flows; prudential policies; international financial stability
JEL Codes: E44; F30; F36; F38; F40; G15; G18; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| prudential policies and effective supervision in the home countries of global banks (G28) | dampen the global financial cycle (F65) |
| stronger regulatory frameworks (G38) | enhanced risk absorption (G32) |
| stronger regulatory frameworks (G38) | improved risk management (G38) |
| enhanced risk absorption and improved risk management (G32) | smaller amplitude responses of cross-border lending to changes in risk sentiment (F65) |
| access to internal and official liquidity (F34) | lower amplitude of global liquidity responses during stress events (F65) |
| effective liquidity management within banking organizations (G33) | stabilize financial flows across borders (F32) |
| risk migration (R20) | challenges for moderating global liquidity flows (F65) |