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The credit composition of global liquidity

Helmut Herwartz, Christian Ochsner and Hannes Rohloff

No 409, University of Göttingen Working Papers in Economics from University of Goettingen, Department of Economics

Abstract: We conceptualize global liquidity as global monetary policy and credit components by means of a large-scale dynamic factor model in the spirit of Eickmeier,Gambacorta, and Hofmann (2014). Going beyond previous work, we decompose aggregate credit components into credit supply and demand flows directed at the public (governments) and private sector (businesses and households). We show that this decomposition enhances the understanding of global liquidity considerably. Whereas global public sector credit supply is best understood as a safe-haven lending factor from an investors perspective, lenders supply the private sector with credit to maximize profits along the business cycle. Moreover, the public sector demands credit in times of bust-episodes, whereas private entities demand credit in times of booms. In particular, we find that our global credit estimates explain substantial variance shares of a large panel of international financial aggregates.

Keywords: global liquidity; credit composition; financial cycle; dynamic factor model (search for similar items in EconPapers)
JEL-codes: C32 C38 E32 E44 E51 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-fdg and nep-mac
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Working Paper: The Credit Composition of Global Liquidity (2021) Downloads
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