Reviewing Excess Liquidity Measures - A Comparison for Asset Markets

Drescher, Christian (2011): Reviewing Excess Liquidity Measures - A Comparison for Asset Markets.

Abstract

The conduct of US monetary policy is often accompanied by controversial debates on the adequacy of monetary conditions. These can result from different concepts of excess liquidity measures. The paper analyzes the theoretical and empirical information content of these concepts for asset markets. The analysis classifies, reviews and assesses measures of monetary conditions. For those that qualify as excess liquidity measures, the analysis continues with a comparison of the sources of imbalances and a discussion of the adequacy for asset markets. The theoretical results are cross-checked with empirical evidence. All excess liquidity measures are estimated and compared in the light of recent US asset bubbles. The analysis draws the following main conclusions. Firstly, not all measures of monetary conditions qualify as excess liquidity measure. Secondly, the increasing relevance of asset markets leads to growing distortions of excess liquidity measures. Thirdly, the choice of excess liquidity measure has influence on the assessment of monetary conditions in asset markets.

• Item Type: MPRA Paper
• Language: English
• Keywords: monetary overhang, real money gap, nominal money gap, credit ratios, leverage ratios, price gap, natural interest rate gap, Taylor gap
• Subjects: G - Financial Economics > G1 - General Financial Markets; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit

References

Adalid, R. and C. Detken, “Liquidity shocks and asset price boom/bust cycles,” Working Paper No. 732, European Central Bank February 2007.

Adrian, T. and H.-S. Shin, “Financial Intermediary Leverage and Value-at-Risk,” Staff Report No. 338, Federal Reserve Bank of New York August 2008.

Adrian, T. and H.-S. Shin, “Liquidity, Monetary Policy, and Financial Cycles,” Current Issues in Economics and Finance, Federal Reserve Bank of New York January/February 2008.

Adrian, T. and H.-S. Shin, “Money, Liquidity, and Monetary Policy,” The American Economic Review, May 2009, 99 (2), 600–605.

Adrian, T. and H.-S. Shin, “Liquidity and Leverage,” Journal of Financial Intermediation, July 2010, 19 (3), 418–437.

Adrian, T. and E. Moench, and H.-S. Shin, “Financial intermediation, asset prices, and macroeconomic dynamics,” Staff Reports 422, Federal Reserve Bank of New York 2010.

Akaike, H., “A new look at the statistical model identification,” IEEE Transaction on Automatic Control, 1974, 19, 716–723.

Allen, F. and D. Gale, “Asset Price Bubbles and Monetary Policy,” Center for Financial Institutions Working Papers 01-26, Wharton School Center for Financial Institutions, University of Pennsylvania May 2000.

Assenmacher-Wesche, K. and S. Gerlach, “Monetary policy and financial imbalances: facts and fiction,” Economic Policy, July 2010, 25, 437–482.

Ball, L., “Another look at long-run money demand,” Journal of Monetary Economics, 2001, 47, 31–44.

Baxter, M. and R. G. King, “Measuring Business Cycles Approximate Band-Pass Filters for Economic Time Series,” NBER Working Paper No. 5022, National Bureau of Economic Research February 1995.

Belke, A. and T. Polleit, Monetary Economics in Globalised Financial Markets, Springer, 2009.

Belke, B. and W. Orth, and R. Setzer, “Liquidity and the dynamic pattern of price adjustment: a global view,” Discussion Paper Series 1: Economic Studies No. 25/2008, Deutsche Bundesbank, Research Centre 2008.

Bernanke, B., “Monetary Policy and the Housing Bubble,” 2010. Remarks at the Annual Meeting of the American Economic Association, Atlanta, Georgia, January 3, 2010.

Bernanke, B. and M. Gertler, “Agency Costs, Net Worth, and Business Fluctuations,” The American Economic Review, March 1989, 79 (1), 14–31.