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Reviewing Excess Liquidity Measures - A Comparison for Asset Markets

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  • Drescher, Christian

Abstract

The conduct of US monetary policy is often accompanied by controversial debates on the adequacy of monetary conditions. These can result from different concepts of excess liquidity measures. The paper analyzes the theoretical and empirical information content of these concepts for asset markets. The analysis classifies, reviews and assesses measures of monetary conditions. For those that qualify as excess liquidity measures, the analysis continues with a comparison of the sources of imbalances and a discussion of the adequacy for asset markets. The theoretical results are cross-checked with empirical evidence. All excess liquidity measures are estimated and compared in the light of recent US asset bubbles. The analysis draws the following main conclusions. Firstly, not all measures of monetary conditions qualify as excess liquidity measure. Secondly, the increasing relevance of asset markets leads to growing distortions of excess liquidity measures. Thirdly, the choice of excess liquidity measure has influence on the assessment of monetary conditions in asset markets.

Suggested Citation

  • Drescher, Christian, 2011. "Reviewing Excess Liquidity Measures - A Comparison for Asset Markets," MPRA Paper 30922, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:30922
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    References listed on IDEAS

    as
    1. Ansgar Belke & Thorsten Polleit, 2009. "Monetary Economics in Globalised Financial Markets," Springer Books, Springer, number 978-3-540-71003-5, January.
    2. Belke, Ansgar & Orth, Walter & Setzer, Ralph, 2008. "Liquidity and the dynamic pattern of price adjustment: a global view," Discussion Paper Series 1: Economic Studies 2008,25, Deutsche Bundesbank.
    3. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity, monetary policy, and financial cycles," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 14(Jan).
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    5. Tobias Adrian & Hyun Song Shin, 2008. "Financial intermediary leverage and value at risk," Staff Reports 338, Federal Reserve Bank of New York.
    6. Detken, Carsten & Adalid, Ramón, 2007. "Liquidity shocks and asset price boom/bust cycles," Working Paper Series 732, European Central Bank.
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    More about this item

    Keywords

    monetary overhang; real money gap; nominal money gap; credit ratios; leverage ratios; price gap; natural interest rate gap; Taylor gap;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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