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Money and liquidity effects: Separating demand from supply

Author Info

  • 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.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 34 (2010)
Issue (Month): 9 (September)
Pages: 1732-1747

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Handle: RePEc:eee:dyncon:v:34:y:2010:i:9:p:1732-1747
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

Keywords: Money Liquidity Bayesian VAR identification Sign restrictions;

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Cited by:

  1. Eddie Gerba & Klemens Hauzenberger, 2014. "Estimating US fiscal and monetary interactions in a time varying VAR," LSE Research Online Documents on Economics 56406, London School of Economics and Political Science, LSE Library.
  2. 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.

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