Abstract

On the Monetary Relevance of the Euromarkets

A distinction can be made among three liquidity aggregation methods: The IMF method defines domestic liquidity as the sum of residents’ domestic demand and time deposits expressed in the national currency and domestic cash and secondary liquidity held by domestic non-bankers; in the case of the “loanable fund method”, the quantity of money comprises all domestic, liquid bank deposits, including those of foreign banks and non-bankers; the third approach, termed the “functional” approach, is based, not on liquid bank deposits with domestic banks, but on all liquid assets held by domestic non-bankers. The functional approach to liquidity aggregation is of theoretical, conceptional value because the entire purchasing power in the hands of domestic non-bankers is covered. On the other hand, this method involves considerable empirical difficulties, because the monetary authorities of the various countries can generally establish the foreign liquidity of domestic non-bankers only to a very limited extent. Hence it would be necessary to solve the data acquisition problem in order to take advantage of the benefits of the functional approach.