Monetary policy shocks in the euro area and global liquidity spillovers

We analyse the international transmission of monetary shocks with a focus on the effects of foreign liquidity on the euro area. We estimate two domestic structural VAR models for the euro area and then we introduce a global liquidity 14 aggregate. The impulse responses show that a positive shock to foreign liquidity leads to permanent increases in the euro area M3 aggregate and the price level, a temporary rise in real output and a temporary appreciation of the euro 14 real effective exchange rate. Moreover, we find that innovations in global liquidity play an important role in explaining price and output fluctuations. Copyright (c) 2007 John Wiley & Sons, Ltd.