The Global Liquidity Paradox C.P. Chandrasekhar and Jayati Ghosh

One global fall-out of the sub-prime crisis in the US is a liquidity squeeze that central banks in the developed countries are attempting to counter by pumping liquidity into the system and reducing interest rates. This is indeed paradoxical, since the crisis in the first place was a result of an excessive build up of liquidity in the international system, leading to a synchronized boom in stock and real estate markets across the globe. Explaining the paradox requires understanding how the liquidity spiral occurs and how such liquidity is put to use by a liberalized and globalized financial system.

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