Redefining Liquidity for Monetary Policy

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...

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Bibliographic Details
Published in:East Asian economic review 2018-09, Vol.22 (3), p.307-336
Main Authors: Kim, Kyunghun, Lee, Il Houng, Shim, Won
Format: Article
Language:Korean
Subjects:
Credit to GDP Gap
Financial Stability
Inflation Targeting
Liquidity
Monetary Policy
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Summary: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.
ISSN:2508-1640
2508-1667