Abstract
We conduct an empirical investigation into the economic implications of aggregate liquidity shocks, through the lens of monetary aggregates, in harmony with conventional monetary policy shocks in an estimated time-varying parameter VAR model. Our results suggest that the transmission of aggregate liquidity shocks changes substantially throughout time with the magnitude of these shocks increasing during recessions. We provide statistically significant evidence in favour of asymmetric contributions of these shocks to macroeconomic fluctuations during the implementation of Quantitative Easing relative to the Great Recession. During this period, aggregate liquidity shocks explain, on average, 32% and 47% of the variance in real GDP and inflation at business cycle frequency, respectively.
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