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Money, Prices and Liquidity Effects: Separating Demand from Supply

  • Chadha, J.S.
  • Corrado, L.
  • Sun, Q.

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 and inflation 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 dominated the time series in both the UK and the US 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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File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe0855.pdf
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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0855.

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Date of creation: Nov 2008
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Handle: RePEc:cam:camdae:0855
Contact details of provider: Web page: http://www.econ.cam.ac.uk/index.htm

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  1. repec:dgr:kubcen:200188 is not listed on IDEAS
  2. Faust, Jon, 1998. "The robustness of identified VAR conclusions about money," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 49(1), pages 207-244, December.
  3. Jagjit S. Chadha & Luisa Corrado & Sean Holly, 2008. "Reconnecting Money to Inflation: The Role of the External Finance Premium," Studies in Economics 0816, School of Economics, University of Kent.
  4. Dedola, Luca & Neri, Stefano, 2006. "What does a technology shock do? A VAR analysis with model-based sign restrictions," Working Paper Series 0705, European Central Bank.
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  9. Ireland, Peter N, 1996. "The Role of Countercyclical Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 704-23, August.
  10. Uhlig, Harald, 1999. "What are the Effects of Monetary Policy on Output? Results from an Agnostic Identification Procedure," CEPR Discussion Papers 2137, C.E.P.R. Discussion Papers.
  11. Pamela Labadie, 1991. "The term structure of interest rates over the business cycle," Finance and Economics Discussion Series 159, Board of Governors of the Federal Reserve System (U.S.).
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  14. Bernanke, Ben S. & Mihov, Ilian, 1998. "The liquidity effect and long-run neutrality," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 49(1), pages 149-194, December.
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  18. William D. Lastrapes & W. Douglas McMillin, 2004. "Cross-Country Variation in the Liquidity Effect: The Role of Financial Markets," Economic Journal, Royal Economic Society, vol. 114(498), pages 890-915, October.
  19. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
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  21. Jon Faust, 1998. "The robustness of identified VAR conclusions about money," International Finance Discussion Papers 610, Board of Governors of the Federal Reserve System (U.S.).
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