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


  • Helge Berger
  • Thomas Harjes


Global excess liquidity prevalent across 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 a longer-term interest rate and output effects and focuses on US and Japanese liquidity as relevant proxies for global developments from a euro area perspective. We find that, in particular, excess liquidity in the US tends to lead developments in euro area liquidity. US excess liquidity is also 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. There is some evidence that, at least in part, this result seems to be related to a weakening of the effectiveness of monetary policy in the euro area interest during times of excessive US liquidity. In contrast, the influence of euro area excess liquidity on euro area inflation is more limited. Copyright 2009 Blackwell Publishing Ltd

Suggested Citation

  • Helge Berger & Thomas Harjes, 2009. "Does Global Liquidity Matter for Monetary Policy in the Euro Area?," International Finance, Wiley Blackwell, vol. 12(1), pages 33-55, May.
  • Handle: RePEc:bla:intfin:v:12:y:2009:i:1:p:33-55

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    References listed on IDEAS

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    Cited by:

    1. Choi, Woon Gyu & Kang, Taesu & Kim, Geun-Young & Lee, Byongju, 2017. "Global liquidity transmission to emerging market economies, and their policy responses," Journal of International Economics, Elsevier, vol. 109(C), pages 153-166.
    2. repec:kap:iaecre:v:18:y:2012:i:1:p:28-39 is not listed on IDEAS
    3. Marie-Louise Djigbenou, 2014. "Determinants of Global Liquidity Dynamics:a FAVAR approach," Working Papers hal-00956314, HAL.
    4. Hammoudeh, Shawkat & Nguyen, Duc Khuong & Sousa, Ricardo M., 2015. "US monetary policy and sectoral commodity prices," Journal of International Money and Finance, Elsevier, vol. 57(C), pages 61-85.
    5. Jason Jones & Nora Collins & Lauren Sribnick, 2012. "External Influences on Business Cycle Synchronization in the Euro Area," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 18(1), pages 28-39, February.
    6. Nguyen, Vu Hong Thai & Boateng, Agyenim, 2015. "Bank excess reserves in emerging economies: A critical review and research agenda," International Review of Financial Analysis, Elsevier, vol. 39(C), pages 158-166.

    More about this item

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission


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