The Credit Composition of Global Liquidity
MAGKS Working Paper 15-2021
64 Pages Posted: 3 Feb 2021 Last revised: 29 Jul 2021
Date Written: July 9, 2021
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: Suggested Citation