On the monetary measures of global liquidity

This study constructs and examines the dynamics of theoretical and atheoretical measures of global liquidity, using monthly data on the components of broad money over the period 2001M12-2017M12 for 39 high income countries. We group the countries into five regional blocks as categorized by the World Bank: East Asia and the Pacific, Europe and Central Asia, Latin America and the Caribbean, Middle East and North Africa, and North America. The atheoretical measures exploited by this study comprise of the simple-sum, GDP-weighted growth rates and PCA based aggregation methods; whereas theoretical measures include the currency equivalent and Divisia index techniques of monetary aggregation. We employ a graphical approach to investigate the trends and dynamics of the aggregates overtime, and a cross-correlation between cyclical components of global real economic activity and the lag of cyclical components of the measures of global liquidity to gauge the strength of their associations. The findings of this study reveal that theoretical measures outperform atheoretical ones in effective delineation of financial and liquidity conditions, and policy stance. Their cyclical components are also strongly associated with those of global real business activity. The currency equivalent measure, besides being a leading indicator of the shift in policy stance, has a sturdy association with global real business activity. Moreover, the theoretical measures, as noted by some empirical studies, contain some information content that the atheoretical lack.