What is global excess liquidity, and does it matter?

This paper endeavours to provide a comprehensive analysis of the nature and the possible importance of “global excess liquidityâ€, a concept which has attracted considerable attention in recent years. The contribution of this paper is threefold. First, we present some conceptual discussion on the meaning of excess liquidity in countries with developed financial markets, where the monetary base plays only a relatively minor quantitative role. Moreover, we analyse the theoretical channels through which shocks to excess liquidity may be transmitted across borders. The co-movement between several measures of excess liquidity across a relatively large number of countries is significant, but the evidence of cross-country spill-over of excess liquidity on excess liquidity and nominal spending abroad is not very strong. Last, we estimate an SVAR model for an aggregate of the major industrialised countries and analyse the transmission of shocks to global excess liquidity to a number of domestic variables in the world’s two largest economies (the US and the euro area). Our overall conclusion is that global excess liquidity appears to be a useful measure of the monetary policy stance at the level of the world economy. Moreover, there is some evidence that global excess liquidity shocks have some spill-over on output, the price level and asset prices in the euro area, while the US appears to be more insulated from global shocks