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Money and liquidity effects: Separating demand from supply

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Author Info

  • Chadha, Jagjit S.
  • Corrado, Luisa
  • Sun, Qi

Abstract

In the canonical monetary policy model, money is endogenous to the optimal path for interest rates and output. But when liquidity provision by banks dominates the demand for transactions money from the real economy, money is likely to contain information for future output because of its impact on financial spreads. And so we decompose broad money into primitive demand and supply shocks. We find that supply shocks have played a significant role in the time series in each of the USA, UK and Eurozone in the short to medium term. We further consider to what extent the supply of broad money is related to policy or to liquidity effects from financial intermediation.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 34 (2010)
Issue (Month): 9 (September)
Pages: 1732-1747

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Handle: RePEc:eee:dyncon:v:34:y:2010:i:9:p:1732-1747

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Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Money Liquidity Bayesian VAR identification Sign restrictions;

References

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  8. Ben S. Bernanke & Ilian Mihov, 1998. "The Liquidity Effect and Long-Run Neutrality," NBER Working Papers 6608, National Bureau of Economic Research, Inc.
  9. Jagjit S. Chadha & Luisa Corrado & Sean Holly, 2008. "Reconnecting Money to Inflation: The Role of the External Finance Premium," Studies in Economics 0816, Department of Economics, University of Kent.
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  13. William D. Lastrapes & W. Douglas McMillin, 2004. "Cross-Country Variation in the Liquidity Effect: The Role of Financial Markets," Economic Journal, Royal Economic Society, vol. 114(498), pages 890-915, October.
  14. Charles T. Carlstrom & Timothy S. Fuerst, 1995. "Interest rate rules vs. money growth rules: a welfare comparison in a cash-in-advance economy," Working Paper 9504, Federal Reserve Bank of Cleveland.
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  16. Lucas, Robert E, Jr, 1996. "Nobel Lecture: Monetary Neutrality," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 661-82, August.
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Cited by:
  1. Eddie Gerba & Klemens Hauzenberger, 2013. "Estimating US Fiscal and Monetary Interactions in a Time Varying VAR," Studies in Economics 1303, Department of Economics, University of Kent.
  2. Hyun Jeong Kim & Hyun Song Shin & Jacho Yun, 2013. "Monetary Aggregates and the Central Bank’s Financial Stability Mandate Money is the balance sheet counterpart to bank lending. As such, highly procyclical components of money reflect incremental ban," International Journal of Central Banking, International Journal of Central Banking, vol. 9(1), pages 69-108, January.

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