Money, Prices and Liquidity Effects: Separating Demand from Supply

Jagjit S. Chadha (), Luisa Corrado () and Qi Sun

Studies in Economics from Department of Economics, University of Kent

Abstract: In the canonical monetary policy model, money is endogenous to the optimal path for interest rates, output. But when liquidity provision by banks dominates the demand for transactions money from the real economy, money is likely to contain information for future output and inflation because of its impact on financial spreads. And so we decompose broad money into primitive demand and supply shocks. We find that supply shocks have dominated the time series in both the UK and the US in the short to medium term. We further consider to what extent the supply of broad money is related to policy or to liquidity effects from financial intermediation.

Keywords: Money; Prices; Bayesian; VAR Identification; Sign Restrictions (search for similar items in EconPapers)
JEL-codes: E32 F32 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
Date: 2008-11
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Working Paper: Money, Prices and Liquidity Effects: Separating Demand from Supply (2008)
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