Redefining Liquidity for Monetary Policy

32 Pages Posted: 30 Jan 2018

See all articles by Kyunghun Kim

Kyunghun Kim

Korea Institute for International Economic Policy

Il Houng Lee

The Bank of Korea

Won Shim

The Bank of Korea

Multiple version iconThere are 2 versions of this paper

Date Written: January 19, 2018

Abstract

This paper proposes a monetary aggregate “Liquidity” that could serve as a useful indicator for gauging the appropriateness of monetary policy. If liquidity rises above a certain threshold, it is signaling that monetary policy is losing traction due to structural and other impediments even when the inflation gap remains open. This indicator supplements the financial cycle approach but adds value by providing a benchmark that is derived from the national account, and not based on its own trend. Over the last two decades, each time this measure rose above the threshold range, it was followed by a decline in GDP growth. The latter was greater when accompanied by a high physical asset value to GDP, e.g., an elevated property market.

Keywords: Liquidity, Monetary policy, Inflation targeting, Financial stability

JEL Classification: E52, E31, E32, G01

Suggested Citation

KIim, Kyunghun and Lee, Il Houng and Shim, Won, Redefining Liquidity for Monetary Policy (January 19, 2018). KIEP Research Paper, Staff Papers 18-01, Available at SSRN: https://ssrn.com/abstract=3112135 or http://dx.doi.org/10.2139/ssrn.3112135

Kyunghun KIim (Contact Author)

Korea Institute for International Economic Policy ( email )

[30147] Building C, Sejong National Research Compl
Seoul, 370
Korea, Republic of (South Korea)

Il Houng Lee

The Bank of Korea ( email )

39, Namdaemun-ro, Jung-gu
Seoul, 04531
Korea, Republic of (South Korea)

Won Shim

The Bank of Korea ( email )

Korea, Republic of (South Korea)

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