Accounting for global liquidity: reloading the matrix

Speech by Mr Hyun Song Shin, Economic Adviser and Head of Research of the BIS, at the IMF-IBRN Joint Conference "Transmission of macroprudential and monetary policies across borders", Washington DC, 19 April 2017.

Exchange rates affect the economy through a financial channel, as well as the trade channel. The financial channel works in the opposite direction to the trade channel. In emerging market economies especially, a weakening of the domestic currency against the dollar saps both cross-border bank lending and investment. Such effects flow through the dense interconnections of dollar lending in the global financial system. In devising policy for financial stability, a tight focus on underlying causes (excess leverage and funding risk) rather than on the symptoms (capital flows) stands a better chance of being more effective in addressing the vulnerabilities as they emerge.