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Liquidity is a quantitative measure of all cash and credit available to financial markets, once the immediate transactions needs of the real economy have been fulfilled. It is based on flow of funds data for ‘sources’ rather than ‘uses’. We provide flow data in nominal local currency and US dollar terms, as well as in z-score format to ease comparisons.

Flow of funds accounting ties everything together and enforces a consistency because deficits must be funded and debts cannot accumulate for ever. We define ‘Liquidity’ as the flow of cash plus credit, but our scope lies far beyond the traditional banking systems in the new shadow banking realm that has benefitted from deregulation and innovation. Looked at more in conventional terms, we monitor the changes in both money and its velocity. Velocity varies greatly, spurred in particular by financial innovation and by the ebb and flow of funds between the industrial economy and the asset or financial economy, which is our main focus.

Where appropriate it does. Not surprisingly, both categories are most important in the US, and of some importance in Europe and Asia, e.g. China. Essentially, the shadow banks cover all sources of credit that are not supplied by the traditional banks. They include: (1) commercial paper issuance; (2) lending by mortgage banks and government agencies, e.g. Fannie Mae and Freddie Mac; (3) securitisation; (4) credit cards, hire purchase and other forms of consumer finance; (5) derivatives, but only where the transaction increases credit.

The data are largely measures of liquidity flows. We also collect short-term credit spreads and interest rates to construct financial conditions indexes (FCI) that serve as cross-checks. This template is applied across the 80 economies we cover.

Our approach to studying Global Liquidity uses factor models comprising some thirty financial and credit variables for each of the eighty economies that make up our database. These factors are combined into our GLI™ (Global Liquidity Indexes) using fixed weights. Although these weights do not come directly from an optimisation process, they turn out to be close to principal components.

Compared to most economic series, liquidity is a relatively stable series. However, there are revisions. The bulk of these occur within the first month following release. This is because of the nature of the estimation process. To maximise time sensitivity, we produce a ‘flash’ estimate of liquidity roughly 10 working days after the end of the month in question.