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

26 Pages Posted: 11 Mar 2009

See all articles by Helge Berger

Helge Berger

Free University Berlin - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Thomas Harjes

International Monetary Fund (IMF)

Date Written: Janurary 2009

Abstract

Global excess liquidity is sometimes believed to limit sovereign monetary policy even in large economies, including the euro area. There is much discussion about what constitutes global excess liquidity and our approach adjusts liquidity for longer-term interest rate and output effects. We find that especially excess liquidity in the U.S. leads developments in euro area liquidity. U.S. excess liquidity also enters consistently positive as a determinant of euro area inflation. There is some evidence that this result may be related to a weakening of the effectiveness of monetary policy in the euro area during times of excessive U.S. liquidity.

Keywords: Excess liquidity, Europe, Euro Area, United States, Japan, Monetary policy, Interest rates, Inflation

Suggested Citation

Berger, Helge and Harjes, Thomas, Does Global Liquidity Matter for Monetary Policy in the Euro Area? (Janurary 2009). IMF Working Paper No. 09/17, Available at SSRN: https://ssrn.com/abstract=1356444

Helge Berger

Free University Berlin - Department of Economics ( email )

Boltzmannstr. 20
Berlin 14195, 14195
Germany
+49 30 838-54037 (Phone)
+49 30 838-52782 (Fax)

HOME PAGE: http://www.wiwiss.fu-berlin.de/berger/eng_index.htm

CESifo (Center for Economic Studies and Ifo Institute for Economic Research) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany
+49 89 9224 1266 (Phone)
+49 89 9224 1409 (Fax)

HOME PAGE: http://www.CESifo.de

Thomas Harjes

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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