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Money, Prices and Liquidity Effects: Separating Demand from Supply

  • Jagjit S. Chadha


  • Luisa Corrado
  • Qi Sun

In the canonical monetary policy model, money is endogenous to the optimal path for interest rates, 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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Paper provided by School of Economics, University of Kent in its series Studies in Economics with number 0817.

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Date of creation: Nov 2008
Date of revision:
Handle: RePEc:ukc:ukcedp:0817
Contact details of provider: Postal: School of Economics, University of Kent, Canterbury, Kent, CT2 7NP
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