Money and output asymmetry: the unintended consequences of central banks’ obsession with inflation

Abstract

ABSTRACT The study re-examines the relationship between money and output for the US and the UK using quarterly data up to 2019. Modern central banks are focused on controlling inflation and adjust their monetary policy and liquidity accordingly. However, it is common practice to overlook the precise effects of those actions on other variables. Unlike prior research, which has mainly focused on the linear relationship, this paper examines the asymmetric impact of money on output. The results show that a decrease in the amount of money has a much more adverse impact on output than an increase. Globally, during COVID-19, there was an infusion of liquidity that might have been useful in the short term, but the withdrawal of that excess liquidity, as has been done currently by some major economies, may have long-term effects on those economies’ output.