Quantitative Easing (QE), changes in global liquidity and financial instability

New paper by Esteban Pérez. From the abstract:

This paper argues that QE led to significant changes in the global financial system, which, are not conducive to greater financial stability. Through a policy of reserve accumulation, QE disconnected base money from the money supply and deposits from loans. Jointly with the deleveraging process of global banks, QE contributed to restrain the supply of bank credit growth throughout the world. Also global banks continued to expand their trading on the basis of opaque instruments such as derivatives. Moreover, by altering the relative profitability of investing in different assets, QE exerted a positive effect on the performance of the international bond market. This not only spilled into emerging market economies expanding the debt of both the financial sector and the non-financial corporate sector but also has reinforced the role of the asset management industry in financial markets. Due to its concentration and interconnectedness, illiquidity, and pro-cyclicality the asset management industry poses important risks to financial stability.

Read full paper here.