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Liquidity and the dynamic pattern of price adjustment: a global view

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  • Belke, Ansgar
  • Orth, Walter
  • Setzer, Ralph

Abstract

Global liquidity expansion has been very dynamic since 2001. Contrary to conventional wisdom, high money growth rates have not coincided with a concurrent rise in goods prices. At the same time, however, asset prices have increased sharply, significantly outpacing the subdued development in consumer prices. This paper examines the interactions between money, goods and asset prices at the global level. Using aggregated data for major OECD countries, our VAR results support the view that different price elasticities on asset and goods markets explain the recently observed relative price change between asset classes and consumer goods. --

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Bibliographic Info

Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2008,25.

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Date of creation: 2008
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Handle: RePEc:zbw:bubdp1:7564

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Keywords: Global liquidity; inflation control; monetary policy transmission; asset prices;

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References

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  1. Frederic S. Mishkin, 2007. "Housing and the monetary transmission mechanism," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 359-413.
  2. Gunther Schnabl & Andreas Hoffmann, 2008. "Monetary Policy, Vagabonding Liquidity and Bursting Bubbles in New and Emerging Markets: An Overinvestment View," The World Economy, Wiley Blackwell, vol. 31(9), pages 1226-1252, 09.
  3. Browne, Frank & Cronin, David, 2007. "Commodity prices, money and inflation," Working Paper Series 0738, European Central Bank.
  4. Canova, Fabio & Ciccarelli, Matteo & Ortega, Eva, 2004. "Similarities and convergence in G-7 cycles," Working Paper Series 0312, European Central Bank.
  5. Matteo Ciccarelli & Beno�t Mojon, 2010. "Global Inflation," The Review of Economics and Statistics, MIT Press, vol. 92(3), pages 524-535, August.
  6. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 1-48, February.
  7. Belke, Ansgar & Gros, Daniel, 2007. "Instability of the Eurozone? On Monetary Policy, House Prices and Labor Market Reforms," IZA Discussion Papers 2547, Institute for the Study of Labor (IZA).
  8. Rasmus Ruffer & Livio Stracca, 2007. "What is global excess liquidity, and does it matter?," Money Macro and Finance (MMF) Research Group Conference 2006 120, Money Macro and Finance Research Group.
  9. Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, vol. 58(1), pages 113-44, January.
  10. Adalid, Ramón & Detken, Carsten, 2007. "Liquidity shocks and asset price boom/bust cycles," Working Paper Series 0732, European Central Bank.
  11. Gary B. Gorton, 2008. "The Panic of 2007," NBER Working Papers 14358, National Bureau of Economic Research, Inc.
  12. Stephen P Millard & Simon J Wells, 2003. "The role of asset prices in transmitting monetary and other shocks," Bank of England working papers 188, Bank of England.
  13. Ansgar Belke & Thorsten Polleit, 2005. "Monetary Policy and Dividend Growth in Germany: Long-Run Structural Modelling versus Bounds Testing Approach," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 250/2005, Department of Economics, University of Hohenheim, Germany.
  14. Hofmann, Boris, 2006. "Do monetary indicators (still) predict euro area inflation?," Discussion Paper Series 1: Economic Studies 2006,18, Deutsche Bundesbank, Research Centre.
  15. Barbara Roffia & Andrea Zaghini, 2007. "Excess Money Growth and Inflation Dynamics," International Finance, Wiley Blackwell, vol. 10(3), pages 241-280, December.
  16. Scharnagl, Michael & Schumacher, Christian, 2007. "Reconsidering the role of monetary indicators for euro area inflation from a Bayesian perspective using group inclusion probabilities," Discussion Paper Series 1: Economic Studies 2007,09, Deutsche Bundesbank, Research Centre.
  17. Sousa, Joao Miguel & Zaghini, Andrea, 2006. "Global monetary policy shocks in the G5: A SVAR approach," CFS Working Paper Series 2006/30, Center for Financial Studies (CFS).
  18. Greiber, Claus & Setzer, Ralph, 2007. "Money and housing: evidence for the euro area and the US," Discussion Paper Series 1: Economic Studies 2007,12, Deutsche Bundesbank, Research Centre.
  19. Massimo Giuliodori, 2005. "The Role Of House Prices In The Monetary Transmission Mechanism Across European Countries," Scottish Journal of Political Economy, Scottish Economic Society, vol. 52(4), pages 519-543, 09.
  20. Favero, Carlo A., 2001. "Applied Macroeconometrics," OUP Catalogue, Oxford University Press, number 9780198296850, October.
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Cited by:
  1. Ansgar Belke & Andreas Rees, 2009. "The Importance of Global Shocks for National Policy Makers - Rising Challenges for Central Banks," Ruhr Economic Papers 0135, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  2. Andreas Hoffmann, 2010. "An Overinvestment Cycle In Central And Eastern Europe?," Metroeconomica, Wiley Blackwell, vol. 61(4), pages 711-734, November.
  3. Hoffmann, Andreas, 2012. "Did the Fed and ECB react asymmetrically with respect to asset market developments?," Working Papers 103, University of Leipzig, Faculty of Economics and Management Science.
  4. 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.
  5. Drescher, Christian, 2011. "Reviewing Excess Liquidity Measures - A Comparison for Asset Markets," MPRA Paper 30922, University Library of Munich, Germany.
  6. Hoffmann, Andreas, 2009. "Fear of depression - Asymmetric monetary policy with respect to asset markets," MPRA Paper 17522, University Library of Munich, Germany.

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