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Money and liquidity effects: Separating demand from supply

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  • 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.

Suggested Citation

  • Chadha, Jagjit S. & Corrado, Luisa & Sun, Qi, 2010. "Money and liquidity effects: Separating demand from supply," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1732-1747, September.
    • Handle: RePEc:eee:dyncon:v:34:y:2010:i:9:p:1732-1747
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    Cited by:

    1. Breitenlechner, Max & Nuutilainen, Riikka, 2019. "China's monetary policy and the loan market : How strong is the credit channel in China?," BOFIT Discussion Papers 15/2019, Bank of Finland, Institute for Economies in Transition.
    2. Gerba, Eddie, 2018. "What is the fiscal stress in Euro Area? Evidence from a joint monetary-fiscal structural model," LSE Research Online Documents on Economics 88300, London School of Economics and Political Science, LSE Library.
    3. Jagjit S. Chadha, 2014. "Financial frictions and macroeconomic models: a tour d'horizon," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 11(1), pages 80-98, April.
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    5. Jagjit S. Chadha, 2012. "World Real Interest Rates: A Tale of Two Regimes," Studies in Economics 1205, School of Economics, University of Kent.
    6. Chadha, Jagjit S. & Corrado, Luisa & Holly, Sean, 2014. "A Note On Money And The Conduct Of Monetary Policy," Macroeconomic Dynamics, Cambridge University Press, vol. 18(8), pages 1854-1883, December.
    7. Villa, Stefania & Yang, Jing, 2011. "Financial intermediaries in an estimated DSGE model for the United Kingdom," Bank of England working papers 431, Bank of England.
    8. Baumeister, Christiane & Hamilton, James D., 2021. "Reprint: Drawing conclusions from structural vector autoregressions identified on the basis of sign restrictions," Journal of International Money and Finance, Elsevier, vol. 114(C).
    9. Jagjit Chadha & Young-Kwan Kang, 2016. "Finance and Credit in a Model of Monetary Policy," National Institute of Economic and Social Research (NIESR) Discussion Papers 471, National Institute of Economic and Social Research.
    10. Eddie Gerba, 2018. "What is the Fiscal Stress in Euro Area? Evidence from a Joint Monetary-Fiscal Structural Model," Revista ESPE - Ensayos Sobre Política Económica, Banco de la República, vol. 36(85), pages 21-47, November.
    11. Eddie Gerba & Klemens Hauzenberger, 2013. "Estimating US Fiscal and Monetary Interactions in a Time Varying VAR," Studies in Economics 1303, School of Economics, University of Kent.
    12. Baumeister, Christiane & Hamilton, James D., 2020. "Drawing conclusions from structural vector autoregressions identified on the basis of sign restrictions," Journal of International Money and Finance, Elsevier, vol. 109(C).
    13. Hyun Jeong Kim & Hyun Song Shin & Jacho Yun, 2013. "Monetary Aggregates and the Central Bank’s Financial Stability Mandate," International Journal of Central Banking, International Journal of Central Banking, vol. 9(1), pages 69-108, January.
    14. repec:zbw:bofitp:2019_015 is not listed on IDEAS
    15. Max Breitenlechner & Riikka Nuutilainen, 2023. "China’s Monetary Policy and the Loan Market: How Strong is the Credit Channel in China?," Open Economies Review, Springer, vol. 34(3), pages 555-577, July.
    16. Corrado, Luisa & Rossi, Isolina, 2019. "Anatomy of credit-less recoveries," Journal of Macroeconomics, Elsevier, vol. 62(C).
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    18. Breitenlechner, Max & Nuutilainen, Riikka, 2019. "China's monetary policy and the loan market: How strong is the credit channel in China?," BOFIT Discussion Papers 15/2019, Bank of Finland Institute for Emerging Economies (BOFIT).
    19. Eddie Gerba, 2018. "What is the Fiscal Stress in Euro Area? Evidence from a Joint Monetary-Fiscal Structural Model," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 36(85), pages 21-47, April.

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