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Whither Liquidity Shocks? Implications for R∗ and Monetary Policy

Author

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  • Giorgio Massari

    (University of Pavia)

  • Luca Portoghese

    (University of Pavia)

  • Patrizio Tirelli

    (University of Pavia)

Abstract

We show that popular models of (flight-to-) liquidity shocks rely on strongly counterfactual implications for asset returns and the composition of firms’ liabilities, including the return spread between bank deposits and T-bills and the share of bank loans on corporate debt. We also uncover some counterfactual/implausible interpretations of the Fed’s monetary policy stance during recession periods, as hinted by the estimated gap between policy and natural rates. By including the relevant financial variables as observables in our empirical model, we find that liquidity shocks played a negligible role and became virtually irrelevant after 2010. Our estimates also imply that the slowdown in productivity growth, not liquidity shocks, caused the post-2010 fall in the natural rate. Finally, our estimates provide a quite different interpretation of the monetary policy stance.

Suggested Citation

  • Giorgio Massari & Luca Portoghese & Patrizio Tirelli, 2024. "Whither Liquidity Shocks? Implications for R∗ and Monetary Policy," DEM Working Papers Series 217, University of Pavia, Department of Economics and Management.
    • Handle: RePEc:pav:demwpp:demwp0217
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    File URL: https://economiaemanagement.dip.unipv.it/sites/dip10/files/2024-03/DEMWP0217.pdf
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    More about this item

    Keywords

    natural rate of interest; DSGE models; liquidity shocks; flight-to-quality; financial frictions;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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