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Does global liquidity matter for monetary policy in the Euro area?

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  • Berger, Helge
  • Harjes, Thomas

Abstract

Global excess liquidity roaming the world’s financial markets (or its sudden absence) is sometimes believed to limit sovereign monetary policy even in large economies such as the euro area. However, there is still discussion about what constitutes global excess liquidity and how exactly it shapes the policy environment. Our approach adjusts liquidity for longerterm interest rate and output effects and focuses on U.S. and Japanese liquidity as relevant proxies for global developments from a euro area perspective. We find that both excess liquidity in Japan and, in particular, the U.S. tend to lead developments in euro area liquidity. U.S. excess liquidity also enters consistently positive as a determinant of euro area inflation and is shown to be Granger-causal for euro area inflation in an out-of-sample forecasting exercise. In part, this result seems to be related to a weakening of the euro area interest rate channel during times of excessive U.S. liquidity. In contrast, the influence of Japanese and euro area excess liquidity on euro area inflation is more limited. --

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Bibliographic Info

Paper provided by Free University Berlin, School of Business & Economics in its series Discussion Papers with number 2008/13.

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Date of creation: 2008
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Handle: RePEc:zbw:fubsbe:200813

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Keywords: Global excess liquidity; euro area; inflation; monetary policy; interest rate channel; forecasting accuracy.;

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Cited by:
  1. Marie-Louise Djigbenou, 2014. "Determinants of Global Liquidity Dynamics:a FAVAR approach," Working Papers 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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