Measures of excess liquidity

The aim of this note is to provide an overview of various measures of “excess liquidity”,which can be defined as the deviation of the actual stock of money from an estimated equilibriumlevel. Given their dynamic nature, the excess liquidity measures under review are - in thelight of long and variable lags of monetary policy - very useful tools to quantify future pricepressures. In addition, excess liquidity measures consider inflation as a purely monetary phenomenon:neither the “output gap” nor “liquidity gap” – although both form an integral part ofthe concepts – can be held responsible for inducing a persistent rise in the price level. Despitestrong theoretical support, the usefulness of excess liquidity measures depends on the stabilityof money demand, a question which has of course to be answered in the realm of empiricalresearch.