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On the economic impact of aggregate liquidity shocks: The case of the UK

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  • Ellington, Michael
  • Milas, Costas

Abstract

We conduct an empirical investigation into the economic implications of aggregate liquidity shocks, through the lens of monetary aggregates, in harmony with conventional monetary policy shocks in an estimated time-varying parameter VAR model. Our results suggest that the transmission of aggregate liquidity shocks changes substantially throughout time with the magnitude of these shocks increasing during recessions. We provide statistically significant evidence in favour of asymmetric contributions of these shocks to macroeconomic fluctuations during the implementation of Quantitative Easing relative to the Great Recession. During this period, aggregate liquidity shocks explain, on average, 32% and 47% of the variance in real GDP and inflation at business cycle frequency, respectively.

Suggested Citation

  • Ellington, Michael & Milas, Costas, 2021. "On the economic impact of aggregate liquidity shocks: The case of the UK," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 737-752.
    • Handle: RePEc:eee:quaeco:v:80:y:2021:i:c:p:737-752
    DOI: 10.1016/j.qref.2018.09.008
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    More about this item

    Keywords

    Liquidity shocks; Time-varying parameter VAR; Money growth; Sign restrictions;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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