Liquidity Matters: Money Non-Redundancy in the Euro Area Business Cycle

This paper presents evidence of money non-redundancy in shaping Euro Area business cycle. The dynamic effects of liquidity are evaluated by means of an agnostic approach. Results show that shocks to monetary aggregates permanently raise prices, even if to a different degree depending on the time span and the asset components considered, and have a sizeable short-run effect on output. Liquidity shocks account for a non-negligible share of economic fluctuations. Finally, the linkages with financial markets are examined: the effects of liquidity do not vanish when accounting for financial variables such as the external finance premium, housing wealth, price earnings ratios, long term rate and real exchange rate.