Procyclicality and Monetary Aggregates
Financial intermediaries borrow in order to lend. When credit is increasing rapidly, the traditional deposit funding (core liabilities) is supplemented with other funding (non-core liabilities). We explore the hypothesis that monetary aggregates reflect the size of non-core and core liabilities and hence convey information on the stage of the financial cycle. In emerging economies with open capital markets, non-core liabilities of the banking system take the form of short-term foreign exchange liabilities, increasing the vulnerability to the outbreak of "twin crises" where a liquidity crisis is compounded by a currency crisis.
This paper was presented at the 2010 Bank of Korea Research Conference (May 31 - June 1, 2010) and at the NBER EASE meetings under its former title "Macroprudential Policy and Monetary Aggregates". We are grateful to our discussants Kyungsoo Kim, Mark Spiegle, Michael Devereux and Somchai Jitsuchon and to the other participants at the two meetings for their comments. We also thank Andrew Rose and Takatoshi Ito for their guidance in preparing the current version of our paper. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.