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Liquidity shocks and asset price boom/bust cycles

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Author Info
Ramón Adalid () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
Carsten Detken () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)

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Abstract

We provide systematic evidence for the association of liquidity shocks and aggregate asset prices during mechanically identified asset price boom/bust episodes for 18 OECD countries since the 1970s, while taking care of the endogeneity of money and credit. Our derivation of liquidity shocks allows for frequent shifts in velocity as they are derived as structural shocks from VARs in growth rates. Residential property price developments and money growth shocks accumulated over the boom periods are able to well explain the depth of post-boom recessions. We further suggest that liquidity shocks are a driving factor for real estate prices during boom episodes. During normal times however, the relative predictive power of liquidity shocks seems to shift from asset price inflation to consumer price inflation. The results only hold for broad money growth based liquidity shocks and not for private credit growth shocks. JEL Classification: C33, E41, E51, E58

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Paper provided by European Central Bank in its series Working Paper Series with number 732.

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Length: 54 pages
Date of creation: Feb 2007
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Handle: RePEc:ecb:ecbwps:20070732

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Keywords: Liquidity shocks; asset price booms; money and credit aggregates; role of money; monetary policy; real estate prices.;

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ansgar Belke & Walter Orth, 2007. "Global Excess Liquidity and House Prices - A VAR Analysis for OECD Countries," Ruhr Economic Papers 0037, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen. [Downloadable!]
  2. Dieter Gerdesmeier & Barbara Roffia & Hans-Eggert Reimers, 2009. "Asset price misalignments and the role of money and credit," Working Paper Series 1068, European Central Bank. [Downloadable!]
  3. Gabriel Jiménez & Steven Ongena & José Luis Peydró & Jesús Saurina, 2009. "Hazardous times for monetary policy: What do twenty-three million bank loans say about the effects of monetary policy on credit risk-taking?," Banco de España Working Papers 0833, Banco de España. [Downloadable!]
  4. Bernardina Algieri & Thierry Bracke, 2007. "Patterns of Current Account Adjustment – Insights from Past Experience," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  5. Frank Smets, 2007. "Housing is the business cycle: commentary," Proceedings, Federal Reserve Bank of Kansas City, pages 235-243. [Downloadable!]
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  7. Bernardina Algieri & Thierry Bracke, 2007. "Patterns of current account adjustment - insights from past experience," Working Paper Series 762, European Central Bank. [Downloadable!]
  8. Ansgar Belke & Walter Orth & Ralph Setzer, 2008. "Sowing the seeds for the subprime crisis: does global liquidity matter for housing and other asset prices?," International Economics and Economic Policy, Springer, vol. 5(4), pages 403-424, December. [Downloadable!] (restricted)
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