Redefining Liquidity for Monetary Policy
30 Pages Posted: 17 Oct 2018
There are 2 versions of this paper
Redefining Liquidity for Monetary Policy
Date Written: September 30, 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, Credit to GDP Gap
JEL Classification: E52, E31, E32, G01
Suggested Citation: Suggested Citation
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