The Credit Composition of Global Liquidity

We conceptualize global liquidity as global monetary policy and credit componentsby 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 atbusinesses, households and governments. We show that this decomposition enhances theunderstanding of global liquidity considerably. In particular, we find that our global creditestimates explain substantial variance shares of a large panel of international financial ag-gregates. Moreover, we extensively document that the prevalence of sectoral credit shocksvaries 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 suggestfor instance that, whereas global government sector credit supply is best understood asa safe-haven lending factor from an investors perspective, lenders supply businesses andhouseholds with credit to maximize profits along the financial cycle