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Does Global Liquidity Matter for Monetary Policy in the Euro Area?

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Author Info
Helge Berger
Thomas Harjes

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Abstract

Global excess liquidity is sometimes believed to limit sovereign monetary policy even in large economies, including the euro area. There is much discussion about what constitutes global excess liquidity and our approach adjusts liquidity for longer-term interest rate and output effects. We find that especially excess liquidity in the U.S. leads developments in euro area liquidity. U.S. excess liquidity also enters consistently positive as a determinant of euro area inflation. There is some evidence that this result may be related to a weakening of the effectiveness of monetary policy in the euro area during times of excessive U.S. liquidity.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/17.

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Length: 24 pages
Date of creation: 28 Jan 2009
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Handle: RePEc:imf:imfwpa:09/17

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Related research
Keywords: Excess liquidity ; Europe ; Euro Area ; United States ; Japan ; Monetary policy ; Interest rates ; Inflation ;

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