Monetary Policy During Liquidity Dry-Ups

Abstract

We provide new international evidence for a monetary policy liquidity transmission channel in the United States, United Kingdom, and the Eurozone. The central banks of these countries are, with a different degree, able to soften the economic downward spiral after an unexpected arrival of a financial market illiquidity shock. In order to uncover this transmission channel, we rely on a nonlinear and international economic set-up to distinguish between times of liquidity crisis and non-crisis and to account for common (global) and country specific (local) shocks. We also fnd that out of these central banks, the Federal Reserve has an especially influential transmission channel with strong and beneficial spillover effects to the United Kingdom and the Eurozone economy.

Keywords: liquidity, global shocks, multi-country, monetary policy

JEL Classification: G01, G10, G15, E44, E52