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

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  • Helge Berger
  • Thomas Harjes

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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Bibliographic Info

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

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Length: 26
Date of creation: 01 Jan 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/17

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Keywords: Interest rates; inflation; monetary policy; price level; money stock; monetary aggregates; money demand; monetary fund; monetary economics; monetary transmission; monetary aggregate; central bank; money growth; monetary conditions; monetary analysis; real money; inflation rates; monetary transmission mechanism; monetary targeting; forecasting inflation; quantity theory of money; rates of inflation; money market; monetary indicators; rate of inflation; nominal variables; inflation forecasts; real output; inflationary pressure; theory of money; low inflation; monetary shocks; price stability; domestic monetary conditions; transmission of monetary policy; inflation rate; monetary union; contractionary monetary policy; terms of trade; monetary expansion; monetary measures; quantity theory; foreign currency; domestic monetary policy; macroeconomic performance; inflationary pressures;

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Cited by:
  1. Marie-Louise Djigbenou, 2014. "Determinants of Global Liquidity Dynamics:a FAVAR approach," Working Papers, HAL hal-00956314, HAL.
  2. Jason Jones & Nora Collins & Lauren Sribnick, 2012. "External Influences on Business Cycle Synchronization in the Euro Area," International Advances in Economic Research, Springer, Springer, vol. 18(1), pages 28-39, February.

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