The credit composition of global liquidity

We conceptualize global liquidity as global monetary policy and credit components by means of a large-scale dynamic factor model in the spirit of Eickmeier,Gambacorta, and Hofmann (2014). Going beyond previous work, we decompose aggregate credit components into credit supply and demand flows directed at the public (governments) and private sector (businesses and households). We show that this decomposition enhances the understanding of global liquidity considerably. Whereas global public sector credit supply is best understood as a safe-haven lending factor from an investors perspective, lenders supply the private sector with credit to maximize profits along the business cycle. Moreover, the public sector demands credit in times of bust-episodes, whereas private entities demand credit in times of booms. In particular, we find that our global credit estimates explain substantial variance shares of a large panel of international financial aggregates.