The funds may, however, face liquidity demands from other counterparties, particularly in times of stress – a point I’ll come back to in a moment. The greater diversity of players and instruments, and the increase in liquidity, have had a profound impact on how financial markets function. Volatility and risk premia have fallen steadily over this period of rapid innovation.
The IMF report noted that although emerging market economies in Asia and Latin America continue to experience robust growth, they are now facing the risk of over-heating with inflation increasing at a faster rate than could be explained by rising commodity and food prices.