Assessing excess liquidity in the euro area: the role of sectoral distribution of money
The strong and prolonged deviation of money growth from its reference value since 2001 has caused concern among policy-makers about the upside risks to price stability from monetary developments. In this article we provide evidence that these risks might have been smaller until 2005 than regularly assumed. Three basic findings support this view. First, a sectoral breakdown of money holdings shows that current excess liquidity conditions have been partly related to the acceleration of nonbank financial intermediaries' money demand, as well as to the accumulation of marketable instruments. Such increases are likely to be associated more to portfolio choices than to transaction motives. Second, evidence from balance sheet data on investment funds points to a general increase in the relative importance of this sector in the economy, rather than to a higher degree of liquidity of their asset positions, thus reflecting, to a large extent, a permanent change in the financial structure of the economy. Third, excess liquidity measures that exclude nonbank financial intermediaries' money holdings have more predictive power for future inflation at medium-term horizons than those that include them.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 43 (2011)
Issue (Month): 23 ()
|Contact details of provider:|| Web page: http://www.tandfonline.com/RAEC20|
|Order Information:||Web: http://www.tandfonline.com/pricing/journal/RAEC20|
References listed on IDEAS
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.:
- Detken, Carsten & Smets, Frank, 2004.
"Asset price booms and monetary policy,"
Working Paper Series
0364, European Central Bank.
- K. Alec Chrystal & Paul Mizen, 2005.
"Other financial corporations: Cinderella or ugly sister of empirical monetary economics?,"
International Journal of Finance & Economics,
John Wiley & Sons, Ltd., vol. 10(1), pages 63-80.
- K Alec Chrystal & Paul Mizen, 2001. "Other financial corporations: Cinderella or ugly sister of empirical monetary economics?," Bank of England working papers 151, Bank of England.
- Fabio Bagliano & Roberto Golinelli & Claudio Morana, 2002. "Core inflation in the Euro area," Applied Economics Letters, Taylor & Francis Journals, vol. 9(6), pages 353-357.
- James H. Stock & Mark W.Watson, 2003.
"Forecasting Output and Inflation: The Role of Asset Prices,"
Journal of Economic Literature,
American Economic Association, vol. 41(3), pages 788-829, September.
- James H. Stock & Mark W. Watson, 2001. "Forecasting output and inflation: the role of asset prices," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
- James H. Stock & Mark W. Watson, 2001. "Forecasting Output and Inflation: The Role of Asset Prices," NBER Working Papers 8180, National Bureau of Economic Research, Inc.
- Ryland Thomas, 1997. "The Demand for M4: A Sectoral Analysis Part 2 The Corporate Sector," Bank of England working papers 62, Bank of England.
- Nicoletti-Altimari, Sergio, 2001. "Does money lead inflation in the euro area?," Working Paper Series 0063, European Central Bank.
- Cassola, Nuno & Morana, Claudio, 2004.
"Monetary policy and the stock market in the euro area,"
Journal of Policy Modeling,
Elsevier, vol. 26(3), pages 387-399, April.
- Cassola, Nuno & Morana, Claudio, 2002. "Monetary policy and the stock market in the euro area," Working Paper Series 0119, European Central Bank.
- James H. Stock & Mark W. Watson, 1999.
NBER Working Papers
7023, National Bureau of Economic Research, Inc.
- Coenen, Guenter & Vega, Juan Luis, 1999.
"The demand for M3 in the euro area,"
Working Paper Series
0006, European Central Bank.
- Gunter Coenen & Juan Luis Vega, 2000. "The Demand for M3 in the Euro Area," Econometric Society World Congress 2000 Contributed Papers 0976, Econometric Society.
- Claudio Morana & Fabio Cesare Bagliano, 2007. "Inflation and monetary dynamics in the USA: a quantity-theory approach," Applied Economics, Taylor & Francis Journals, vol. 39(2), pages 229-244.
- Carstensen, Kai, 2006.
"Stock Market Downswing and the Stability of European Monetary Union Money Demand,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 24, pages 395-402, October.
- Carstensen, Kai, 2006. "Stock market downswing and the stability of European monetary union money demand," Munich Reprints in Economics 19940, University of Munich, Department of Economics.
- Hallman, Jeffrey J & Porter, Richard D & Small, David H, 1991. "Is the Price Level Tied to the M2 Monetary Aggregate in the Long Run?," American Economic Review, American Economic Association, vol. 81(4), pages 841-58, September.
- Nelson, Edward, 2003.
"The future of monetary aggregates in monetary policy analysis,"
Journal of Monetary Economics,
Elsevier, vol. 50(5), pages 1029-1059, July.
- Nelson, Edward, 2003. "The Future of Monetary Aggregates in Monetary Policy Analysis," CEPR Discussion Papers 3897, C.E.P.R. Discussion Papers.
- Claudio E. V. Borio & Philip Lowe, 2004. "Securing sustainable price stability: should credit come back from the wilderness?," BIS Working Papers 157, Bank for International Settlements.
- George T. McCandless & Warren E. Weber, 1995. "Some monetary facts," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-11.
- Lars E.O. Svensson & Stefan Gerlach, 2001.
"Money and inflation in the Euro Area: A case for monetary indicators?,"
BIS Working Papers
98, Bank for International Settlements.
- Gerlach, Stefan & Svensson, Lars E. O., 2003. "Money and inflation in the euro area: A case for monetary indicators?," Journal of Monetary Economics, Elsevier, vol. 50(8), pages 1649-1672, November.
- Gerlach, Stefan & Svensson, Lars E O, 2002. "Money and Inflation in the Euro-Area: A Case for Monetary Indicators?," CEPR Discussion Papers 3392, C.E.P.R. Discussion Papers.
- Stefan Gerlach & Lars E.O. Svensson, 2000. "Money and Inflation in the Euro Area: A Case for Monetary Indicators?," NBER Working Papers 8025, National Bureau of Economic Research, Inc.
- Nicoletta Batini & Edward Nelson, 2001.
"The Lag from Monetary Policy Actions to Inflation: Friedman Revisited,"
06, Monetary Policy Committee Unit, Bank of England.
- Batini, Nicoletta & Nelson, Edward, 2001. "The Lag from Monetary Policy Actions to Inflation: Friedman Revisited," International Finance, Wiley Blackwell, vol. 4(3), pages 381-400, Winter.
- Philippe Moutot & Dieter Gerdesmeier & Adriana Lojschová & Julian von Landesberger, 2007. "The role of other financial intermediaries in monetary and credit developments in the euro area," Occasional Paper Series 75, European Central Bank.
- Paul Fisher & Juna Vega, 1993. "An Empirical Analysis of M4 in the United Kingdom," Bank of England working papers 21, Bank of England.
- Hiroshi Fujiki & Casey B. Mulligan, 1996. "Production, Financial Sophistication, and the Demand for Money by Households and Firms," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 14(1), pages 65-103, July.
- Claus Brand & Nuno Cassola, 2004. "A money demand system for euro area M3," Applied Economics, Taylor & Francis Journals, vol. 36(8), pages 817-838.
- Laidler, David, 1997.
"Notes on the Microfoundations of Monetary Economics,"
Royal Economic Society, vol. 107(443), pages 1213-23, July.
- Laidler, D., 1996. "Notes on the Microfoundations of Monetary Economics," UWO Department of Economics Working Papers 9610, University of Western Ontario, Department of Economics.
- Massimiliano Marcellino & James Stock & Mark Watson, 2005.
"A Comparison of Direct and Iterated Multistep AR Methods for Forecasting Macroeconomic Time Series,"
285, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Marcellino, Massimiliano & Stock, James H. & Watson, Mark W., 2006. "A comparison of direct and iterated multistep AR methods for forecasting macroeconomic time series," Journal of Econometrics, Elsevier, vol. 135(1-2), pages 499-526.
- Marcellino, Massimiliano & Stock, James H & Watson, Mark W, 2005. "A Comparison of Direct and Iterated Multistep AR Methods for Forecasting Macroeconomic Time Series," CEPR Discussion Papers 4976, C.E.P.R. Discussion Papers.
- Lucas, Robert E, Jr, 1996. "Nobel Lecture: Monetary Neutrality," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 661-82, August.
- Carmine Trecroci & Juan Vega, 2002. "The information content of M3 for future inflation in the Euro area," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 138(1), pages 22-53, March.
- Carlos Robalo Marques & Nuno Alves & João Sousa, 2006. "Some Issues Concerning the Use of M3 for Monetary Policy Analysis in the Euro Area," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
- Joaquim Vieira Ferreira Levy & Alessandro Calza & Dieter Gerdesmeier, 2001. "Euro Area Money Demand; Measuring the Opportunity Costs Appropriately," IMF Working Papers 01/179, International Monetary Fund.
- Warne, Anders & Bruggeman, Annick & Donati, Paola, 2003. "Is the demand for euro area M3 stable?," Working Paper Series 0255, European Central Bank.
- Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements.
- Ryland Thomas, 1997. "The Demand for M4: A Sectoral Analysis. Part 1 - The Personal Sector," Bank of England working papers 61, Bank of England.
When requesting a correction, please mention this item's handle: RePEc:taf:applec:v:43:y:2011:i:23:p:3213-3230. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.