Global liquidity as an early warning indicator of asset price booms: G5 versus broader measures
AbstractWe test the performance of various measures of global liquidity as early warning indicators of booms in house and equity prices in 20 OECD countries between 1970 and 2010. We use a panel probit approach to test the relative performance of global liquidity measures based on two aggregation schemes: the traditional measures, based on G5 data, and broader measures, based on data for up to 26 countries/currency areas. Our results show that, in the last decade, global liquidity measures outperformed domestic measures as early warning indicators. Between the two global liquidity measures, G5 aggregates often outperformed broader global liquidity measures. The search for the best early warning indicator showed that the G5 real narrow money gap performed best for booms in house prices, while the global real private credit growth gap performed best for booms in equity prices, either when aggregated over G5 or over a broader sample of countries. Nevertheless, given the rising importance of the emerging market economies and a declining share of G5 in global liquidity, the current superior performance of G5 measures may not warrant their superior performance in the future. Therefore, given the importance of global liquidity measures in warning about asset price booms, the need for constructing broader global liquidity measures is warranted.
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Bibliographic InfoPaper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 377.
Date of creation: May 2013
Date of revision:
Early Warning Indicators; Asset Price Booms; Global Liquidity;
Find related papers by JEL classification:
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
- F65 - International Economics - - Economic Impacts of Globalization - - - Finance
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
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