The Production of Liquidity Services in National Accounts

Across the developed countries, the financial services accounted in National Accounts are only those services consumed by households, such as financial advisory services offered to households who are selecting a mutual fund. We view that this is a major drawback, and it is urgent to measure properly the financial services provided by different types of assets for liquidity purposes A poor understanding of the contribution of such financial services could result in a misinformed view of how the financial sector in an economy is doing, which could lead to inappropriate policy decisions.

Investment in National Accounts only includes investment into physical capital, but investment into other assets should also be considered because assets could provide liquidity services in the future. The creation of new financial assets is a kind of service provided by the financial sector of an economy. To maintain the liquidity value of assets is another type of service provided by the financial sector. Nevertheless, the current practice in National Accounts treats assets (new or old) that will be used to fund physical investment separately and the labour/capital cost involved as intermediate inputs. Our project does not treat them as intermediate inputs, and we aim at using the user costs and liquidity premium of various assets (MBS, corporate bonds, and even government bonds) to measure the liquidity services. Again, the liquidity services include the services to produce new assets to fund new physical investments and services that are used to maintain existing assets' liquidity usage.

Our project will shed light on how the financial sector has evolved since World War II, and whether financial innovations provide valuable services. One can also analyze liquidity services exported and imported in an international context, and the degree of liquidity services produced in various countries.

Area

Economics

UCL leads

• Dr Wei Cui, Department of Economics