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Quick takeaways
- Understanding liquidity is important for gauging the balance between the ability of the financial system to handle debt and its impact on asset markets.
- Liquidity measures should consider more comprehensive factors beyond central bank balance sheets, including international and wholesale markets.
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Understanding Liquidity and Its Impact on Asset Markets
Liquidity is a measure of balance sheet capacity in the financial system, specifically the ability to effectively roll over debt. This differs from traditional money supply measures like M1 or M2. Liquidity is influenced by factors such as the flow of cash and credit in global financial markets, including contributions from central banks and conventional banks. Understanding liquidity is important for gauging the balance between the ability of the financial system to handle debt and its impact on asset markets.
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