IDEAS home Printed from https://ideas.repec.org/p/zbw/fubsbe/200813.html
   My bibliography  Save this paper

Does global liquidity matter for monetary policy in the Euro area?

Author

Listed:
  • Berger, Helge
  • Harjes, Thomas

Abstract

Global excess liquidity roaming 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 longerterm interest rate and output effects and focuses on U.S. and Japanese liquidity as relevant proxies for global developments from a euro area perspective. We find that both excess liquidity in Japan and, in particular, the U.S. tend to lead developments in euro area liquidity. U.S. excess liquidity also enters 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. In part, this result seems to be related to a weakening of the euro area interest rate channel during times of excessive U.S. liquidity. In contrast, the influence of Japanese and euro area excess liquidity on euro area inflation is more limited.

Suggested Citation

  • Berger, Helge & Harjes, Thomas, 2008. "Does global liquidity matter for monetary policy in the Euro area?," Discussion Papers 2008/13, Free University Berlin, School of Business & Economics.
  • Handle: RePEc:zbw:fubsbe:200813
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/28079/1/571554873.PDF
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Gambacorta, L. & Martínez-Pagés, J. & Sevestre, P. & Worms, A., 2002. "Financial Systems and the Role of Banks in Monetary Policy Transmission in the Euro Area.Author-Name: Ehrmann, M," Working papers 93, Banque de France.
    2. Orphanides, Athanasios & Porter, Richard D., 2000. "P revisited: money-based inflation forecasts with a changing equilibrium velocity," Journal of Economics and Business, Elsevier, vol. 52(1-2), pages 87-100.
    3. Magnus Saxegaard, 2006. "Excess Liquidity and Effectiveness of Monetary Policy; Evidence from Sub-Saharan Africa," IMF Working Papers 06/115, International Monetary Fund.
    4. Nelson, Edward, 2003. "The future of monetary aggregates in monetary policy analysis," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 1029-1059, July.
    5. 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.
    6. Andrés, Javier & David López-Salido, J. & Nelson, Edward, 2009. "Money and the natural rate of interest: Structural estimates for the United States and the euro area," Journal of Economic Dynamics and Control, Elsevier, vol. 33(3), pages 758-776, March.
    7. Rüffer, Rasmus & Stracca, Livio, 2006. "What is global excess liquidity, and does it matter?," Working Paper Series 696, European Central Bank.
    8. Helge Berger & Pär Österholm, 2011. "Does Money Growth Granger Cause Inflation in the Euro Area? Evidence from Out‐of‐Sample Forecasts Using Bayesian VARs," The Economic Record, The Economic Society of Australia, vol. 87(276), pages 45-60, March.
    9. Michael Woodford, 2008. "How Important Is Money in the Conduct of Monetary Policy?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(8), pages 1561-1598, December.
    10. Helge Berger & Ulrich Woitek, "undated". "Does Conservatism Matter? A Time Series Approach to Central Banking," Working Papers 9814, Business School - Economics, University of Glasgow, revised May 1999.
    11. Joao Sousa & Andrea Zaghini, 2008. "Monetary policy shocks in the euro area and global liquidity spillovers," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(3), pages 205-218.
    12. Karl-Heinz Tödter & Hans-Eggert Reimers, 1994. "P-Star as a link between money and prices in Germany," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 130(2), pages 273-289, June.
    13. Assenmacher-Wesche, Katrin & Gerlach, Stefan, 2006. "Understanding the Link between Money Growth and Inflation in the Euro Area," CEPR Discussion Papers 5683, C.E.P.R. Discussion Papers.
    14. Reynard, Samuel, 2007. "Maintaining low inflation: Money, interest rates, and policy stance," Journal of Monetary Economics, Elsevier, vol. 54(5), pages 1441-1471, July.
    15. von Hagen, J, 1995. "Inflation and Monetary Targeting in Germany," Papers 03, American Institute for Contemporary German Studies-.
    16. Carlo Favero & Francesco Giavazzi, 2008. "Should the Euro Area Be Run as a Closed Economy?," American Economic Review, American Economic Association, vol. 98(2), pages 138-145, May.
    17. Peersman, Gert & Smets, Frank, 2001. "The monetary transmission mechanism in the euro area: more evidence from VAR analysis," Working Paper Series 0091, European Central Bank.
    18. 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 841-858, September.
    19. Ashley, R & Granger, C W J & Schmalensee, R, 1980. "Advertising and Aggregate Consumption: An Analysis of Causality," Econometrica, Econometric Society, vol. 48(5), pages 1149-1167, July.
    20. Hofmann, Boris, 2006. "Do monetary indicators (still) predict euro area inflation?," Discussion Paper Series 1: Economic Studies 2006,18, Deutsche Bundesbank.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:kap:iaecre:v:18:y:2012:i:1:p:28-39 is not listed on IDEAS
    2. 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.
    3. 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.
    4. 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.
    5. Marie-Louise Djigbenou, 2014. "Determinants of Global Liquidity Dynamics:a FAVAR approach," Working Papers hal-00956314, HAL.
    6. 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.

    More about this item

    Keywords

    Global excess liquidity; euro area; inflation; monetary policy; interest rate channel; forecasting accuracy.;

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:fubsbe:200813. 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: (ZBW - German National Library of Economics). General contact details of provider: http://edirc.repec.org/data/fwfubde.html .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.