BIS paper anatomises global liquidity

Global liquidity is driven by monetary policy and the supply and demand for credit, according to a Bank for International Settlements working paper, and therefore cannot be assessed with a single indicator.

The authors, Sandra Eickmeier, Leonardo Gambacorta, and Boris Hofmann, note that in the decade before the finanical crisis, global credit supply conditions "loosened markedly", partly as a result of financial deregulation.

However, the authors say, as the crisis built up, global monetary policy was also accommodative, while in the late stages of the boom there was a strong demand for credit.

"The global build-up of financial imbalances ahead of the crisis was thus not caused by a single driver but rather by the combined effects of a number of different forces," the paper says.

Since 2008, monetary policy has remained accommodative, and serves to counteract the prevailing tight credit supply and weak demand, but has not been able to fully offset them, the authors say.

Click here to read the paper.