Does Global Liquidity Matter for Monetary Policy in the Euro Area?

IMF Working Papers, January 1, 2009

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Does Global Liquidity Matter for Monetary Policy in the Euro Area?

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Bibliographic details

• Authors: Helge Berger, Thomas Harjes
• Published: January 1, 2009
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451871647.001

Summary and main findings

• Global excess liquidity is sometimes believed to limit sovereign monetary policy even in large economies, including the euro area.
• The authors adjust liquidity for longer-term interest rate and output effects to define global excess liquidity.
• Especially excess liquidity in the U.S. leads developments in euro area liquidity.
• U.S. excess liquidity enters consistently positive as a determinant of euro area inflation.
• There is some evidence that the positive role of U.S. excess liquidity on euro area inflation may be related to a weakening of the effectiveness of monetary policy in the euro area during times of excessive U.S. liquidity.

Analytical approach and scope

• Approach: adjust liquidity measures for longer-term interest rate and output effects to isolate "excess liquidity."
• Geographic focus: U.S., euro area (EA), with references to "Global" and "JP liquidity" in keywords.
• Outcome variables analyzed: euro area liquidity developments and euro area inflation.

Implications for monetary policy

• Global (and U.S.) excess liquidity can influence the domestic liquidity conditions of a large currency area such as the euro area.
• Excess U.S. liquidity is associated with higher euro area inflation, implying cross-border spillovers that can complicate domestic policy setting.
• Evidence suggests that during periods of excessive U.S. liquidity, the effectiveness of euro area monetary policy may be weakened.

Keywords and subjects (as provided)

• Subject: Asset and liability management, Excess liquidity, Inflation, International liquidity, Liquidity, Liquidity indicators, Liquidity management, Prices
• Keywords: area inflation, EA liquidity, euro area, excess liquidity, Excess liquidity, forecasting accuracy, Global, Global excess liquidity, inflation, interest rate, interest rate channel, International liquidity, JP liquidity, Liquidity, liquidity arbitrage, liquidity condition, liquidity development, Liquidity management, monetary policy, WP

Content in this bundle

• _wp0917 - Results from a VAR for the Euro Area 1991Q1 to 2007Q1, Conditional on the US
  • _wp0917 - Results from a VAR for the Euro Area 1991Q1 to 2007Q1, Conditional on the US (Markdown version)
  • _wp0917 - Results from a VAR for the Euro Area 1991Q1 to 2007Q1, Conditional on the US (PDF)