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Global Liquidity: Drivers, Volatility and Toolkits

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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.

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Notes

  1. Bruno and Shin (2015) also highlight the financial channel of exchange rates working through banks, focusing attention on the specific mechanisms through which changes in currency value engage with institutional features to influence credit flows.

  2. The Bank for International Settlements and other institutions are also active in collecting some of these granular data from across countries, and the countries are investing in even more granular collections and associated repositories.

  3. For details on the complexity of these financial conglomerates, see Cetorelli and Goldberg (2014), Correa and Goldberg (2022), and a summary by Buch and Goldberg (2022) of a broader groups of studies through the International Banking Research Network and published in the Journal of Banking and Finance

  4. See for example, Obstfeld et al. (2005), Klein and Shambaugh (2015), and Obstfeld et al. (2019). Countries with flexible exchange rates have comparative interest rate independence, shielding themselves more from the contractionary output effects of higher interest rates abroad. Goldberg (2013) shows that this autonomy depends partially on the globalization of credit provision through banks.

  5. A rich parallel literature directly considers monetary policy spillovers across borders, looking at credit flows as a complement to work considering interest rate independence and other work on the effects of economic news and announcements.

  6. See also Rey (2016), Rey (2014), Rey (2017).

  7. IMF 15th Annual Research Conference on “Exchange Rates and Financial Globalization”

  8. Goldberg and Krogstrup (2023) discuss the shortcomings of prior constructions and the reasons for their specific construction of the EMP.

  9. The magnitudes of country-specific interventions, even given similar stress levels, also vary across episodes. For example, during the GFC, China accumulated considerable reserves and prevented approximately 15 percent appreciation against the USD, while during the COVID Crisis, interventions played a much smaller role for the renminbi/dollar exchange rate (Goldberg and Kalisa 2022).

  10. This exhibit is inspired by the type of graphics provided in BIS (2022). I extend this visual in multiple directions, including to bank and non-bank global liquidity providers, with bank and non-bank borrowers, and broader categories of cross-border flows.

  11. With this schematic, the implication across decades of developments in policy and technology will be considered in Sect. 3.1.

  12. While domestic banks and hosted foreign banks both intermediate funds to non-bank borrowers in Country A, this form of intermediation is not part of global liquidity.

  13. See Goldberg (2007) for implications of the entry of foreign banks and Buch and Goldberg (2020) for a broader discussion of the benefits and costs of global banking.

  14. See Bussière et al. (2021).

  15. Goldberg and Ravazzolo (2022) consider separately data for mutual funds and EFTs invested in bonds and equities across countries.

  16. Some banking organizations may also have used a variety of legal entities, such as asset-backed-commercial paper vehicles, to arbitrage regulations and increase risk-taking (Gong et al. 2018).

  17. Other research efforts use securities-level data to reclassify investors and borrowers by nationality instead of residency. See Maggiori et al. (2020) and Coppola et al. (2021).

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  1. Federal Reserve Bank of New York, New York, USA

    Linda S. Goldberg

  2. NBER, Cambridge, MA, USA

    Linda S. Goldberg

  3. CEPR, London, UK

    Linda S. Goldberg

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The views in this paper are solely the responsibility of the author and do not necessarily reflect the views of the Federal Reserve Bank of New York or the Federal Reserve System. Special thanks to Viral Acharya, Stefan Avdjiev, Claudia Buch, Matthieu Bussiere, Anusha Chari, Leonardo Elias, Fulvia Fringuellotti, Leonardo Gambacorta, Helene Rey, and Stefano Schiaffi for content discussions and feedback. Stone Kalisa and Oliver Hannaoui provided excellent teamwork and research assistance.

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Goldberg, L.S. Global Liquidity: Drivers, Volatility and Toolkits. IMF Econ Rev 72, 1–31 (2024). https://doi.org/10.1057/s41308-023-00208-9

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