 Excess liquidity and monetary overhangsGerard Caprio and Patrick Honohan No 796, Policy Research Working Paper Series from The World Bank Abstract: The term"excess liquidity"may refer to the share of liquid assets in bank portfolios (the result of a retrenchment in bank lending, or a"credit crunch") or to money holdings of the nonbank public. Excess liquidity may be voluntary or nonvoluntary. In response to excess liquidity, policymakers tend to take steps to drain off the excess so it will not lead to a surge in inflation. In this paper, the authors examine the appropriateness of conventional policy instruments for tightening money in two common cases: 1) when there is a voluntary credit crunch because of a rise in perceived risk of default, and 2) when individuals rationed in the goods market in reforming socialist economies accumulate savings involuntarily ("money overhang"). The authors conclude that neither excess liquidity in the banking systems of the developing world nor the money overhang of the reforming planned economies calls for a response of restrictive monetary policy. A more appropriate policy might be a prudent but not overly restrictive monetary policy and reservation of some part of credit for the emerging private sector. Keywords: Economic Theory&Research; Environmental Economics&Policies; Banks&Banking Reform; Financial Intermediation; Fiscal&Monetary Policy (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:wbk:wbrwps:796 Access Statistics for this paper More papers in Policy Research Working Paper Series from The World Bank 1818 H Street, N.W., Washington, DC 20433. Contact information at EDIRC. |
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