The missing spillover of base expansion into monetary aggregates: Is there a puzzle?

The seeming impotence of monetary base expansion to influence money growth during the global financial crisis and the European sovereign debt crisis, can be regarded as a puzzle. A possible explanation is that central banks have used unconventional monetary policies to pursue dual objectives: to stabilize the financial system and to stimulate the economy. While achieving the latter objective may result in a positive spillover of base money into money growth, this does not necessarily hold for the former objective. This paper aims to disentangle these effects by estimating a state space model in which the monetary base is adjusted for distortions arising from the instability in financial markets. We find that stress in money and bond markets, measured by various indicators, has significantly affected the relationship between base growth and money growth in the EA, but not in the US.