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As financial markets have become more integrated and international capital flows larger, overseas conditions – growth, inflation, terms of trade, spare productive capacity, inflation – all impinge more strongly on the domestic economy. At the same time, the transmission channels of policy have certainly changed, so the policy instruments need to be recalibrated.

In coming to understand this and incorporate the impact of globalisation into the policy process and into financial market assessments, policy-makers and economic commentators alike are searching for indices which compress the complexity of these influences into a few simple measures which will have some predictive power in forecasting the path of the world economy. Stephen Grenville argues here that one of the frequently-used measures – international liquidity – has too many different meanings to be useful. Analogies with concepts of domestic liquidity are misleading in the international context. The best measure of the stance of monetary policy will be the level of interest rates rather than any of the measures of liquidity.

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