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Redefining Liquidity for Monetary Policy

Author

Listed:
  • Kim, Kyunghun

    (Korea Institute for International Economic Policy)

  • Lee, Il Houng

    (Bank of Korea)

  • Shim, Won

    (Bank of Korea)

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.

Suggested Citation

  • Kim, Kyunghun & Lee, Il Houng & Shim, Won, 2018. "Redefining Liquidity for Monetary Policy," East Asian Economic Review, Korea Institute for International Economic Policy, vol. 22(3), pages 307-336, September.
    • Handle: RePEc:ris:eaerev:0346
    DOI: 10.11644/KIEP.EAER.2018.22.3.346
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    More about this item

    Keywords

    Liquidity; Monetary Policy; Inflation Targeting; Financial Stability; Credit to GDP Gap;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G01 - Financial Economics - - General - - - Financial Crises

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