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FINACIALIZATION AND 
MACRO-LIQUIDITY RISK 
LI BAOWEI 
ZHANG YUN 
XIE RUOQING 
25/9/2014 
1
ABSTRACT 
Background: Recent financial crisis and macroeconomic volatility show us excess 
liquidity and liquidity crunch...
CONTENT 
1. Introduction 
2. Review 
2.1 Theoretical Studies of Macro Liquidity 
2.2 Definitions of Liquidity 
3. Money, C...
1. INTRODUCTION 
• June 2013, a "money shortage" reproduction hit China money market. Under the impact of reserve 
repayme...
2. REVIEW 
2.1 Theoretical Studies of Macro Liquidity 
For monetary liquidity stage research and focused on Keynesian 
and...
2. REVIEW 
2.2 Definitions of Liquidity. 
• The most common is the use of financial deepening McKinnon indicator, 
M2 / GD...
2. REVIEW 
2.2 Definitions of Liquidity. 
We summarized in the definition of the various liquidity that there are three 
a...
2. REVIEW 
2.2 Definitions of Liquidity. 
In this paper, a new perspective of Marxist political economics and 
Keynesian, ...
3. MONEY, CREDIT AND THE NATURE OF LIQUIDITY 
• Money supply based on their safety and liquidity in general is divided int...
3. MONEY, CREDIT AND THE NATURE OF LIQUIDITY 
Table 1 Monetary and non-monetary financial assets safety and liquidity anal...
3. MONEY, CREDIT AND THE NATURE OF LIQUIDITY 
Figure 1 Figure currency circulation 
Monetary Assets 
Traditio 
nal 
Financ...
3. MONEY, CREDIT AND THE NATURE OF LIQUIDITY 
Based on Post-Keynesian functions for hoarding knowledge, this paper conside...
4.1 DEFINITIONS OF FINANCIALIZATION 4. Financialization 
and the Produce of 
Macro- Liquidity 
Risk 
Epstein (2001) on the...
4.1 DEFINITIONS OF FINANCIALIZATION 4. Financialization 
and the Produce of 
Macro- Liquidity 
Risk 
From an international...
4.2 THE PRODUCE OF MACRO LIQUIDITY RISK 4. Financialization 
and the Produce of 
Macro- Liquidity 
Risk 
Since the 1990s, ...
4.2 THE PRODUCE OF MACRO LIQUIDITY RISK 4. Financialization 
and the Produce of 
Macro- Liquidity 
Risk 
Stage Process Imp...
4.2 THE PRODUCE OF MACRO LIQUIDITY RISK 4. Financialization 
and the Produce of 
Macro- Liquidity 
Risk 
Table 3 China's f...
5. STUDY OF LIQUIDITY MEASUREMENT 
5.1 Review of Measurement 
Methods 
a. Balance Sheet Analysis 
b. Spread volatility ana...
5. STUDY OF LIQUIDITY MEASUREMENT 
5.2 An Empirical Analysis of China’s Monetary Market 
our empirical analysis of this pa...
5. STUDY OF LIQUIDITY MEASUREMENT 
5.2 An Empirical Analysis of China’s Monetary Market 
A. measure of liquidity fluctuati...
5. STUDY OF LIQUIDITY MEASUREMENT 
14 
12 
10 
8 
6 
4 
2 
0 
IR 
2006 2007 2008 2009 2010 2011 2012 2013 2014 
Figure 2 2...
5. STUDY OF LIQUIDITY MEASUREMENT 
Through the overnight lending rate of the 
relevant diagrams and partial correlation 
c...
5. STUDY OF LIQUIDITY MEASUREMENT 
Both test results are considered models exist autoregressive 
conditional heteroskedast...
5. STUDY OF LIQUIDITY MEASUREMENT 
Table 3 GARCH (1,1) model ARCH LM test results table 
F-statistic 3.14833 
3 
Prob. F(1...
5. STUDY OF LIQUIDITY MEASUREMENT 
B. Spread volatility analysRiEsSID 
10 
8 
6 
4 
2 
0 
-2 
-4 
-6 
2006 2007 2008 2009 ...
5. STUDY OF LIQUIDITY MEASUREMENT 
Table 4 monetary authorities and other depository institutions' balance sheets multivar...
5. STUDY OF LIQUIDITY MEASUREMENT 
Table 5 monetary authorities assets and other depository institutions balance sheet var...
5. STUDY OF LIQUIDITY MEASUREMENT 
Set monetary authorities than illiquid assets and liabilities of safety, other deposito...
6. Policy 
Recommendatio 
ns of Liquidity 
Figure 4 monetary policy interaction with macro-prudential policy 
Monetary Pol...
7. Main 
Conclusions 
In this paper, starting from the functional currency, liquidity is to explore the 
nature of the mon...
THE END 
LI BAOWEI 
ZHANG YUN 
XIE RUOQING 
25/9/2014 
31
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Financilization and Macro-Liquidity Risk: Post Keynesian Financial Fragility Theory

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Financilization and Macro-Liquidity Risk: Post Keynesian Financial Fragility Theory

  1. 1. FINACIALIZATION AND MACRO-LIQUIDITY RISK LI BAOWEI ZHANG YUN XIE RUOQING 25/9/2014 1
  2. 2. ABSTRACT Background: Recent financial crisis and macroeconomic volatility show us excess liquidity and liquidity crunch are alternate in China. This paper considers that it is rooted in three reasons:  Firstly, in the main developed countries, financial development has become increasingly independent from the development of the real economy. Increased finance separate from the real economy investment brings about new financial instruments and transactions which are get rid of the shackles of traditional finance, resulting in a significant change in the macroeconomic structure;  Secondly, high liquidity assets with low risk and other financial assets are complexly alternative in financialization process;  Thirdly, lever mechanism is widely used, leading to increasingly significant financial instability. 2 Macro-Liquidity; Financialization; Monetary; credit
  3. 3. CONTENT 1. Introduction 2. Review 2.1 Theoretical Studies of Macro Liquidity 2.2 Definitions of Liquidity 3. Money, Credit and the Nature of Liquidity 4. Financialization and the Produce of Macro Liquidity Risk 4.1 Definitions of Financialization 4.2 The produce of Macro Liquidity Risk 5. Study of Liquidity Measurement 5.1 Review of Measurement Methods 5.2 An Empirical Analysis of China’s Monetary Market 6. Policy Recommendations of Liquidity 6.1 Monetary Policy 6.2 Macro Prudential 7. Main Conclusions 3
  4. 4. 1. INTRODUCTION • June 2013, a "money shortage" reproduction hit China money market. Under the impact of reserve repayment, expectation of foreign exchange holding decline, greater regulation on bond market, money of payment and other factors, the interbank offered rate was climbing, which means short-term liquidity crunch. June 8, Shanghai interbank offered rates rose 231.2 basis points to 8.294%. • We study the logic of the monetary and credit capital theory from Marx in the development of the foundation, absorb and learn from Minsky's financial instability theory to analyze the current macroeconomic liquidity risk. In this paper, we consider that the national currency is the credit support of the M1 and M2 with deposit insurance protection and other supported by national credit debt assets, equity and financial derivatives markets, such as credit belongs to the support of financial credit assets. • This is not just arising from a single financial institution but rather reflects the overall financial markets. This paper is intended to depart from the functional currency, study the nature of the mechanism of liquidity, and why liquidity generated in the process of the financial supplemented by empirical analysis to propose appropriate policy recommendations for macroeconomic liquidity risk. 4
  5. 5. 2. REVIEW 2.1 Theoretical Studies of Macro Liquidity For monetary liquidity stage research and focused on Keynesian and neo-classical economic theory, research scholars around the world in this regard is quite mature. •Keynes (1936); Tobin (1958) and Kahn (1972); Minsky (1963); Stanfield (1986) •Wray(2012) •Nobuhiro Kiyotaki and John Moore(2002) •Friedman (1968) and Bruner (1968); Stanfield (1986) 5
  6. 6. 2. REVIEW 2.2 Definitions of Liquidity. • The most common is the use of financial deepening McKinnon indicator, M2 / GDP measure of liquidity, the index reflects the interaction between the real economy and the financial market level and did not consider the process of money between financial and non-monetary financial assets alternative relationships. • Kramp define the “liquidity” from three aspects: First, from the due date of assets to define "liquidity", while money is a kind of maturity zero assets, so the money the most, "liquidity" of nature; Second, convenience, the proportion of the stock of money balances and output flows, "liquidity" of the ratio between the size of output; third is the "financial strength" him from the balance sheet of the economy starting to define the "liquidity", namely financial strength is that people hold on government debt and other private sector entities in the market value of debt measure, that "liquidity" is make a financial product conveniently converted to another financial product tools. Definition Kramp to maturity to define liquidity, liquidity is to explain the concept of repetition, does not have real meaning. 6
  7. 7. 2. REVIEW 2.2 Definitions of Liquidity. We summarized in the definition of the various liquidity that there are three aspects of liquidity meaning that monetary liquidity, institutional liquidity and market liquidity. We believe that monetary liquidity means investors will credit the lower currency conversion process for a higher credit non-monetary financial assets arising from liquidity, when the economy in which people are expected to rise in interest rates, tend to hold money instead of bonds , the greater the demand for money speculative motive, resulting in excess liquidity. Liquidity refers to the institutional bodies prefer to non-monetary financial assets into monetary assets, resulting in conversion value of assets between agencies or institutions and individuals, resulting in liquidity, when lack of funds between institutions, the formation of the money shortage, liquidity risk is generated. Market liquidity is a measure in markets monetary financial assets and monetary assets transaction activity, if market liquidity is high, then the more active trading between assets. 7
  8. 8. 2. REVIEW 2.2 Definitions of Liquidity. In this paper, a new perspective of Marxist political economics and Keynesian, Post Keynesian monetary theory is based on three basic propositions, first, the currency can be exchanged commodities, currencies can be exchanged, but not the direct exchange of goods commodities, currencies as medium of exchange, the quest for money because of its ability to meet the payment means the role of the exchange; Second, money is debt, record the borrower's debt and lenders as a form of assets, Minsky argued that anyone can through the issuance of notes in the social accounting system to create money; Third, the existence of debt default risk, due to both lenders and borrowers must be willing to "create money" and "holding money" has generated a lending relationship, which produced a liquidity and default risk. Therefore, this article is essentially Post-Keynesian perspective of research money that liquidity is an alternative non-monetary assets and monetary relationships between assets is determined by the entire financial system has shown. 8
  9. 9. 3. MONEY, CREDIT AND THE NATURE OF LIQUIDITY • Money supply based on their safety and liquidity in general is divided into four levels of M0, M1, M2, M3, etc. M0 is cash in circulation, the monetary base; M1 individuals and businesses rely on credit, such as bank acceptances; credit M2-dependent agencies and organizations, such as time deposits and other enterprises; M3 institutions in the country and credit support, such as treasury bills, financial bonds, margin deposits, foreign currency deposits. 9
  10. 10. 3. MONEY, CREDIT AND THE NATURE OF LIQUIDITY Table 1 Monetary and non-monetary financial assets safety and liquidity analysis Monetary Financial Assets Security Liquidity Category M0 Cash currency Max Max Security M1 Bank Savings Higher Higher M2 Deposits expect of Demand Deposits High High M3 Government Bonds High Low Corporate Bonds Low Low Stock Lower Lower Asset Derivative Min Min Source: This article is based on hierarchical division of monetary and non-monetary financial assets finishing 10
  11. 11. 3. MONEY, CREDIT AND THE NATURE OF LIQUIDITY Figure 1 Figure currency circulation Monetary Assets Traditio nal Financi al Assets Finan cial Deriv atives Real Economy Alter nativ e relati ons National Credit Market Credit Source: This article is based on neo-Marxist political economy and the integration of Keynesian theory carding 11
  12. 12. 3. MONEY, CREDIT AND THE NATURE OF LIQUIDITY Based on Post-Keynesian functions for hoarding knowledge, this paper considers that in the process of development in the current financial and monetary savings had gradually as residents of non-monetary financial assets have higher credit support, people chase money that has more value assets resulting liquidity risk. The period of excess liquidity, which means there are more household savings and cash in circulation, with the same time is the lack of financial assets, thereby forming a financial bubble. We believe that the essence of liquidity is the value of a monetary and non-monetary financial assets between the conversions, credit exchange system. 12
  13. 13. 4.1 DEFINITIONS OF FINANCIALIZATION 4. Financialization and the Produce of Macro- Liquidity Risk Epstein (2001) on the financialization make the following definition: financialization refers to the domestic and international levels, financial markets, financial institutions and the financial industry elites importance of economic performance and economic management system for continuous improvement process. Paley pointed out the impact of financialization is mainly reflected in the financial sector relative to the real sector to enhance the importance of the transfer of income from the real sector to the financial sector, resulting in the distribution of income. Georgia · R · Kerry Pune (2008) considered an accumulation mode, Arrighi endorse this model that profit through trade and financial channels rather than the production of goods produced here in order to obtain financial means and future interest, dividends and capital gains liquidity supply (or transfer) related activities (Arrighi, 1994). Goldsmith related to financial ratios (Financial Interrelations Ratios, FIR) to measure the relative size of the extent of the financial superstructure and financial deepening. Goldsmith with the "financial development" to define the changes in the financial structure, with "economic financialization" to describe the current situation of financial development. 13
  14. 14. 4.1 DEFINITIONS OF FINANCIALIZATION 4. Financialization and the Produce of Macro- Liquidity Risk From an international perspective, we believe that the process of formation of financial time arises from the financial markets, the banking industry can be traced back to the United States in the 19th century, large-scale mergers and acquisitions, and in the late 1970s to become a global trend of financialization, 80 stock era in the United States as the representative of developed countries, bonds, funds market is gradually improving. 14
  15. 15. 4.2 THE PRODUCE OF MACRO LIQUIDITY RISK 4. Financialization and the Produce of Macro- Liquidity Risk Since the 1990s, increasing the degree of financial deepening, lack of supervision caused serious consequences in the 2008 financial crisis. In response to the financial crisis, the Fed lender of last resort to save the city's identity, non-performing assets acquired companies, the introduction of credit facilities, direct way to supplement the lack of liquidity. Former financial regulatory reform, like CDO (bonds backed securities) and CDS (credit default swaps) such complex financial derivatives and hedge funds are not subject to regulation. And later in 2009, the United States launched a comprehensive reorganization of financial markets, 2012 Financial Supervisory Authority referred 692 cases involving potential financial fraud to the United States Securities and Exchange Commission and other law enforcement agencies, including 347 with insider trading related to a strong complement to the Government supervision of the securities industry. 15
  16. 16. 4.2 THE PRODUCE OF MACRO LIQUIDITY RISK 4. Financialization and the Produce of Macro- Liquidity Risk Stage Process Impact Characteristics 1929 -1938 1929 -1938 Establish Federal Home Loan Bank Committee (FHLBB) the Federal Home Loan Bank membership organization established to strengthen the supervision system And promote the development 1933 promulgated the "Glass - Steagall Banking Act" prohibits the payment of interest to banks, demand deposits, prohibiting commercial banks underwriting securities company 1940 -1979 1940 Enacted "Investment Company Act" (ICA) and the "Investment Advisers Act" (IAA) regulate investment securities and investment banking business regulation Early 80-90s 982 Securities and Exchange Commission allows companies to provisions in Section 415 "Securities Act" for all securities under a one-time two years after the issuance of the registration program to improve the efficiency of the stock and bond registration process, the formation of the shelf registration system, to facilitate the issuance and investment bankers tender deregulation Since the 1990s 1999, pass "Financial Services Modernization Act," allows the bank holding company operating a variety of financial services, including deposits and loans, securities brokerage, underwriting, advisory and other Financialization and greater financial regulation Table 2 U.S. Financial Policy Act process of sorting table Source: Based on [America] Alan • Stuttgart forward, Chen Yulu, Wang Zhijie, Cai Ling translation: "Control, relax and re-regulation", Economic Science Press, 1999 edition and U.S. recently news 16
  17. 17. 4.2 THE PRODUCE OF MACRO LIQUIDITY RISK 4. Financialization and the Produce of Macro- Liquidity Risk Table 3 China's financial institutions and interest rate liberalization bill Stag e Process of financialization Features 1992- 2001 1995 "Banking Law" was promulgated on the People's Bank of duties and obligations of commercial banks, responsibility, business rules, financial regulation financial accounting system requirements. Financial regulation is becoming systematic, mixed. 1995 pass the "Commercial Bank Law" and other conditions for the establishment of commercial banks and business to regulate. 1995 promulgated the "Insurance Law", 2002 amended 2009 amendments. 1995 promulgated the "law", provides a ticket, bill of rights and obligations of people and transfer. Since 2001 to now 2001 the "Trust Law" on the subject of rights and obligations, such as the termination of the Trust to change the trust industry norms. Financial markets while strengthening security in the open financial markets, better adapted to China's national conditions and systematic development. 2003 "Securities Investment Fund Law" was promulgated on closed-end funds and open-end funds to regulate, fund manager duties, fund raising, supervision and management regulations; small foreign currency deposit interest rate controls to reduce currency, interest rate floor open. Source: Beijing University Legal Information Network 17
  18. 18. 5. STUDY OF LIQUIDITY MEASUREMENT 5.1 Review of Measurement Methods a. Balance Sheet Analysis b. Spread volatility analysis c. Scenario analysis and stress testing 18
  19. 19. 5. STUDY OF LIQUIDITY MEASUREMENT 5.2 An Empirical Analysis of China’s Monetary Market our empirical analysis of this paper, money market as an object, examine the performance of the macro liquidity risk result that the volatility of the overnight interest rate that results from the start, through the analysis and indicators of the monetary authorities and other depository institutions balance sheets observations, to explore the reasons behind volatility liquidity risk generated by the current balance sheet structure within a reasonable forecast range for the foreseeable future. 19
  20. 20. 5. STUDY OF LIQUIDITY MEASUREMENT 5.2 An Empirical Analysis of China’s Monetary Market A. measure of liquidity fluctuations in the currency market Interbank lending rate refers to the short-term inter-bank lending rate is used, the reflection of the degree of market shortage and excess liquidity, Shibor by China 16 commercial banks offer, as China's interbank lending market benchmark interest rate . Paper selected since October 8, 2006, since Shibor started running to date data March 31, 2014, the establishment of ARCH models to measure fluctuations Shibor, thus reflecting the tightness of the liquidity situation. Figure 2 is October 8, 2006 to March 31, 2014 Overnight Shibor fluctuations, we can see the interest rates have smooth, and therefore do Shibor time sequence diagram. 20
  21. 21. 5. STUDY OF LIQUIDITY MEASUREMENT 14 12 10 8 6 4 2 0 IR 2006 2007 2008 2009 2010 2011 2012 2013 2014 Figure 2 2006.10.8-2014.03.31Shibor overnight call rate fluctuations map Source: People's Bank of China statistics 21
  22. 22. 5. STUDY OF LIQUIDITY MEASUREMENT Through the overnight lending rate of the relevant diagrams and partial correlation chart analysis, we have established three AR lag time series models are as follows: we can get the LM test result is greater than 253.25, P (F (2,2724) ) = 0.0000, so we come to the square of the residual presence of two order autocorrelation sequence, that sequence is present regression model error conditional heteroskedasticity: 22
  23. 23. 5. STUDY OF LIQUIDITY MEASUREMENT Both test results are considered models exist autoregressive conditional heteroskedasticity should be established in AR GARCH basis (3) mean equation on (1,1) model. Mean equation is: After ARCH LM Test test results are as follows in table: 23
  24. 24. 5. STUDY OF LIQUIDITY MEASUREMENT Table 3 GARCH (1,1) model ARCH LM test results table F-statistic 3.14833 3 Prob. F(1,2726) 0.0761 Obs*R-squared 3.147008 Prob. Chi-Square(1) 0.0761 Source: EViews 7.0 software fitting results Description Value statistics fall null hypothesis accepted domain, there is no autoregressive conditional heteroskedasticity in the error term, the prediction of IR, get the overnight lending rate March 31, 2014 was (1.29-1.51,1.29 + 1.51 ). 24
  25. 25. 5. STUDY OF LIQUIDITY MEASUREMENT B. Spread volatility analysRiEsSID 10 8 6 4 2 0 -2 -4 -6 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: People's Bank of China overnight lending rate data processing We can observe fluctuations in interest rates four large range of overnight disassemble: October 2007, February 2011, July 2011 and June 2013. We can observe Correspondingly, 2008 financial crisis occurred in 2007 within a certain time after fluctuations in liquidity indicators, the paper from October 2006 to February 2014 the monetary authorities and other depository institutions' balance sheets analysis were calculated monthly security assets, or assets and liabilities of safety, or the ratio between debt. 25
  26. 26. 5. STUDY OF LIQUIDITY MEASUREMENT Table 4 monetary authorities and other depository institutions' balance sheets multivariate analysis Sample Mean Standa rd Deviati on Min Max Monetar y authoriti es illiquid assets / liabilities security 89 1.27 0.16 1.04 1.52 Security Assets / Total Liabilities 89 0.90 0.06 0.73 0.95 Safety Assets / Assets 89 11.35 4.44 2.76 18.13 Source: People's Bank of China Monthly Data Report Other deposito illiquid assets / liabilities security 89 1.18 0.03 1.12 1.25 Security Assets / Total Liabilities 89 0.25 0.03 0.20 0.29 26
  27. 27. 5. STUDY OF LIQUIDITY MEASUREMENT Table 5 monetary authorities assets and other depository institutions balance sheet variables of relevance compared with Shibor Monetary authorities other depository institutions Illiquid assets / liabilities safe assets / total liabilities security assets / liabilities illiquid assets / liabilities security safe assets / total liabilities security assets / liabilities The correlatio n coefficie nt -0.68 0.36 0.53 0.09 -0.56 -0.56 27
  28. 28. 5. STUDY OF LIQUIDITY MEASUREMENT Set monetary authorities than illiquid assets and liabilities of safety, other depository institutions than illiquid assets and liabilities of safety, y = the last day of each month Shibor rates for regression of y resulting regression equation as follows: 28
  29. 29. 6. Policy Recommendatio ns of Liquidity Figure 4 monetary policy interaction with macro-prudential policy Monetary Policy Macro-prudential Policy Market Rate Credit Mortgage Rates Risk of Banks’ Balance Sheets Price Stability Financial Stability Source: Grant Spencer: <Coordination of monetary policy and macro-prudential policy>, at the Credit Suisse Asian Investment Conference, HongKong, 27 March 2014. 29
  30. 30. 7. Main Conclusions In this paper, starting from the functional currency, liquidity is to explore the nature of the monetary deemed credit assets in the financial trend, investors are more willing to higher levels of credit held by non-monetary financial assets, resulting liquidity risk. It is liquidity risk and excessive amplification alternating the role of credit in which reflects financial leverage played, when credit expansion bubble burst, then there was an economic crisis. Based on empirical analysis of China's currency market, the use of time-series model and balance sheet analysis, results in the future China will be in for some period of illiquidity, which made policy recommendations, by establishing a broader currency policies to control the flow of the system and the establishment of macro-prudential regulatory framework to strengthen liquidity management, and promote economic stability and development. 30
  31. 31. THE END LI BAOWEI ZHANG YUN XIE RUOQING 25/9/2014 31

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