Quantitative easing, changes in global liquidity and financial instability

Esteban Perez Caldentey

No PKWP1701, Working Papers from Post Keynesian Economics Society (PKES)

Abstract: This paper argues that Quantitative Easing (QE) led to significant changes in the global financial system, which, are not conducive to greater financial stability. Through a policy of reserve accumulation, QE disconnected base money from the money supply and deposits from loans. Jointly with the deleveraging process of global banks, QE contributed to restrain the supply of bank credit growth throughout the world. Also global banks continued to expand their trading on the basis of opaque instruments such as derivatives. Moreover, by altering the relative profitability of investing in different assets, QE exerted a positive effect on the performance of the international bond market. This not only spilled into emerging market economies expanding the debt of both the financial sector and the non-financial corporate sector but also has reinforced the role of the asset management industry in financial markets. Due to its concentration and interconnectedness, illiquidity, and pro-cyclicality the asset management industry poses important risks to financial stability.

Keywords: Quantitative easing; financial system; global banks; asset management industry (search for similar items in EconPapers)
JEL-codes: E12 E42 E44 E51 (search for similar items in EconPapers)
Pages: 33
Date: 2017-02
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Quantitative Easing (QE), Changes in Global Liquidity, and Financial Instability (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:pke:wpaper:pkwp1701

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