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What is global excess liquidity, and does it matter?

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Author Info
Rasmus Ruffer (European Central Bank)
Livio Stracca (European Central Bank)

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Abstract

This paper endeavours to provide a comprehensive analysis of the nature and the possible importance of “global excess liquidityâ€, a concept which has attracted considerable attention in recent years. The contribution of this paper is threefold. First, we present some conceptual discussion on the meaning of excess liquidity in countries with developed financial markets, where the monetary base plays only a relatively minor quantitative role. Moreover, we analyse the theoretical channels through which shocks to excess liquidity may be transmitted across borders. The co-movement between several measures of excess liquidity across a relatively large number of countries is significant, but the evidence of cross-country spill-over of excess liquidity on excess liquidity and nominal spending abroad is not very strong. Last, we estimate an SVAR model for an aggregate of the major industrialised countries and analyse the transmission of shocks to global excess liquidity to a number of domestic variables in the world’s two largest economies (the US and the euro area). Our overall conclusion is that global excess liquidity appears to be a useful measure of the monetary policy stance at the level of the world economy. Moreover, there is some evidence that global excess liquidity shocks have some spill-over on output, the price level and asset prices in the euro area, while the US appears to be more insulated from global shocks

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Paper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2006 with number 120.

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Date of creation: 02 Feb 2007
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Handle: RePEc:mmf:mmfc06:120

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Related research
Keywords: Global excess liquidity; monetary aggregates; international transmission of shocks; international economics.;

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Find related papers by JEL classification:
E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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References listed on IDEAS
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    Other versions:
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    Other versions:
  3. Lane, Philip R., 2001. "The new open economy macroeconomics: a survey," Journal of International Economics, Elsevier, vol. 54(2), pages 235-266, August. [Downloadable!] (restricted)
    Other versions:
  4. Michael Ehrmann & Marcel Fratzscher, 2006. "Global financial transmission of monetary policy shocks," Working Paper Series 616, European Central Bank. [Downloadable!]
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  5. João Sousa & Andrea Zaghini, 2004. "Monetary policy shocks in the euro area and global liquidity spillovers," Working Paper Series 309, European Central Bank. [Downloadable!]
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  6. Joao Miguel Sousa & Andrea Zaghini, 2006. "Global Monetary Policy Shocks in the G5: A SVAR Approach," CFS Working Paper Series 2006/30, Center for Financial Studies. [Downloadable!]
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  7. Charles Frederick Kramer & Klaas Baks, 1999. "Global Liquidity and Asset Prices: Measurement, Implications, and Spillovers," IMF Working Papers 99/168, International Monetary Fund.
  8. Matteo Ciccarelli & Benoît Mojon, 2005. "Global inflation," Working Paper Series 537, European Central Bank. [Downloadable!]
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  9. Nelson, Edward, 2003. "The Future of Monetary Aggregates in Monetary Policy Analysis," CEPR Discussion Papers 3897, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  10. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February. [Downloadable!] (restricted)
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  12. Cedric Tille, 1999. "The role of consumption substitutability in the international transmission of shocks," Staff Reports 67, Federal Reserve Bank of New York. [Downloadable!]
  13. Monfort, Alain & Renne, Jean-Paul & Rüffer, Rasmus & Vitale, Giovanni, 2003. "Is Economic Activity in the G7 Synchronized? Common Shocks versus Spillover Effects," CEPR Discussion Papers 4119, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  14. Canova, Fabio, 2003. "The Transmission of US Shocks to Latin America," CEPR Discussion Papers 3963, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  17. Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements. [Downloadable!]
  18. He, Zonglu & Maekawa, Koichi, 2001. "On spurious Granger causality," Economics Letters, Elsevier, vol. 73(3), pages 307-313, December. [Downloadable!] (restricted)
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  20. Holman, Jill Ann & Neumann, Rebecca M, 2002. "Evidence on the Cross-Country Transmission of Monetary Shocks," Applied Economics, Taylor and Francis Journals, vol. 34(15), pages 1837-57, October. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Michael Woodford, 2007. "Globalization and Monetary Control," NBER Working Papers 13329, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Michael Woodford, 2007. "Globalization and Monetary Control," NBER Chapters, in: International Dimensions of Monetary Policy National Bureau of Economic Research, Inc. [Downloadable!]
  3. Ramón Adalid & Carsten Detken, 2007. "Liquidity shocks and asset price boom/bust cycles," Working Paper Series 732, European Central Bank. [Downloadable!]
  4. Ansgar Belke & Walter Orth, 2007. "Global Excess Liquidity and House Prices - A VAR Analysis for OECD Countries," Ruhr Economic Papers 0037, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen. [Downloadable!]
  5. Brenda González-Hermosillo, 2008. "Investors’ Risk Appetite and Global Financial Market Conditions," IMF Working Papers 08/85, International Monetary Fund. [Downloadable!]
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