Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/28079 
Year of Publication: 
2008
Series/Report no.: 
Diskussionsbeiträge No. 2008/13
Publisher: 
Freie Universität Berlin, Fachbereich Wirtschaftswissenschaft, Berlin
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.
Subjects: 
Global excess liquidity
euro area
inflation
monetary policy
interest rate channel
forecasting accuracy.
JEL: 
C22
C53
E31
E52
F42
ISBN: 
3938369841
Document Type: 
Working Paper

Files in This Item:
File
Size
331.15 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.