FINANCE ASSIGNMENT

Advance financial advice

Advance financial advice

Q1 (Part A)

Introduction

Global financial markets have become a key focus of international financial policy decision making in the recent times. This is a reflection of the global liquidity and the drivers are of significant importance in order to bring stability in the global industry. Global liquidity as an important concept for the stability of economies is used in a number of ways and the ambiguity surrounding the concept can not only lead to potential de stabilizing policies but can also cause further economic distress(Webber, 2010, pp. 35-68).

In today's world which gives importance to capital mobility, the same approach cannot be adopted for global liquidity as it was used a few decades ago. It has two components, one the official component and the other a private component.

The official component relating global liquidity can be described as “the funding that is unconditionally available to settle claims through monetary authorities.” .The official component can be approached through numerous instruments which majorly include foreign exchange reserves and swap lines between central banks. Therefore, only central banks can be held responsible for creating the official liquidity in markets.

The programmes of international monetary fund (IMF) and other global monetary institutions can be important drivers for mobilizing official liquidity, but they cannot be prime tools for the creation of liquidity (Bussière & Fratzscher, 2006, pp 953-73) .

The second concept relating to global liquidity is private liquidity, which can be created to a large degree by the cross-border operations of financial institutions such as banks and monetary funds. The key principle behind these two concepts is to ease the methods of financing so that global liquidity can be bought in financial markets (Landau, 2011).

The concept of private liquidity dominates the concepts of official liquidity. Global liquidity is privately or predominately created by both financial and financial institutions operating across the borders. In order to bring financial stability in global markets, a thorough understanding of private liquidity in global markets is of implications. Private global liquidity shows an incremental trend and a tough cyclical component.

The incremental trend is a consequence of deep financial combinations between different geographies and financial modernization. Private global liquidity incorporated in the global financial markets is also highly cyclical as it is determined by deviations in development and growth rates, the monetary policies implemented by governments and most importantly, the risk appetite of institutions and governments.

Private liquidity as a part of global liquidity can also create international spillovers as most of the financial institutions such as banks and other monetary intuitions provide liquidity and solvency to both international and domestic markets. The concept of leveraging and deleveraging is of significance importance for the creation and destruction of private liquidity.

Therefore, private liquidity in global markets is interlinked with dynamic nature of gross capital outflows and inflows in the international markets which predominately includes cross-border monetary movements. This international and dynamic element of global liquidity can create and result in potential instability in the global ...