Paul Tucker highlights two possible international macroeconomic explanations for the period of pronounced credit growth and asset price appreciation prior to the crisis. “First, a fall in the world safe real rate, due to excess savings in the East. Second, increasing Global Liquidity, transmitted through expansive cross-border lending, kicked off by prolonged accommodative monetary policy.” Both of these, he notes, “…involve shifts in risk premia driven by changes in the supply and demand for financial assets.” He stresses that changes in risk premia can be key drivers of fluctuations in asset prices, and probably have substantial influence over macroeconomic fluctuations.
Published on
28 February 2012