The Second Phase of Global Liquidity and Its Impact on Emerging Economies

Abstract

The term “global liquidity ” is often invoked by emerging market policy makers to denote the global factor that drives cross-border spillovers in financial conditions and credit growth. The term is often used in connection with monetary policy spillovers from advanced economies. However, global liquidity is not a term that would receive universal acknowledgement among researchers as being a meaningful concept. The vagueness of the word “liquidity ” as well as its intellectual baggage associated with past academic disputes concerning the role of monetary aggregates in macroeconomics means that many listeners have already erected barriers to whatever comes next in the conversation. That said, the recent BIS report on global liquidity (BIS (2011), the “Landau report”) and the IMF’s work on the topic, both at the behest of the G20, have put the term “global liquidity ” into the titles of official documents, and so it does appear that the term is here to stay.2 For the benefit of defining the issues more clearly, it is useful to distinguish two phases of global liquidity. The first phase, starting roughly in 2003 and lasting until the 2008 crisis, had global 1

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