The Shifting Drivers of Global Liquidity

The sensitivity of the main global liquidity components, international loan and bond flows, to global factors varied considerably over the past decade. The estimated sensitivity to US monetary policy rose substantially in the immediate aftermath of the Global Financial Crisis, peaked around the time of the 2013 Fed “taper tantrum”, and then reverted towards pre-crisis levels. Conversely, the responsiveness of international bank lending to global risk conditions declined steadily throughout the post-crisis period. We show that the main driver of the fluctuations in the estimated sensitivities to US monetary policy was the degree of convergence among advanced economy monetary policies. Meanwhile, the post-crisis fall in the sensitivity of international bank lending to global risk was mainly driven by increases in the lending shares of better-capitalized banking systems.