The Credit Composition of Global Liquidity

MAGKS Working Paper 15-2021

64 Pages Posted: 3 Feb 2021 Last revised: 29 Jul 2021

See all articles by Helmut Herwartz

Helmut Herwartz

University of Goettingen (Göttingen)

Christian Ochsner

Georg-August-Universität Göttingen

Hannes Rohloff

University of Goettingen (Göttingen)

Date Written: July 9, 2021

Abstract

We conceptualize global liquidity as global monetary policy and credit components
by means of a large-scale dynamic factor model. Going beyond previous work, we de-
compose aggregate credit components into credit supply and demand flows directed at
businesses, households and governments. We show that this decomposition enhances the
understanding of global liquidity considerably. In particular, we find that our global credit
estimates explain substantial variance shares of a large panel of international financial ag-
gregates. Moreover, we extensively document that the prevalence of sectoral credit shocks
varies across the financial cycle, characterized by financial sector risk and risk aversion.
For instance, whereas household credit supply is high during financial cycle upswings,
government credit supply increases in response to adverse shocks to the financial cycle.
Moreover, the government sector demands credit in times of bust-episodes, whereas pri-
vate entities demand credit in times of booms. To rationalize our findings, we suggest
for instance that, whereas global government sector credit supply is best understood as
a safe-haven lending factor from an investors perspective, lenders supply businesses and
households with credit to maximize profits along the financial cycle.

Keywords: global liquidity, credit composition, financial cycle, dynamic factor model

JEL Classification: C38, E32, E44, E51

Suggested Citation

Herwartz, Helmut and Ochsner, Christian and Rohloff, Hannes, The Credit Composition of Global Liquidity (July 9, 2021). MAGKS Working Paper 15-2021, Available at SSRN: https://ssrn.com/abstract=3738617 or http://dx.doi.org/10.2139/ssrn.3738617

Helmut Herwartz

University of Goettingen (Göttingen) ( email )

Platz der Gottinger Sieben 3
Gottingen, D-37073
Germany

Christian Ochsner (Contact Author)

Georg-August-Universität Göttingen ( email )

Platz der Göttinger Sieben 3
Göttingen, 37073
Germany

Hannes Rohloff

University of Goettingen (Göttingen) ( email )

Platz der Gottinger Sieben 3
Gottingen, D-37073
Germany

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