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Liquidity and Asset Prices: How Strong Are the Linkages?

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  • Dreger, Christian
  • Wolters, Jürgen

Abstract

The appropriate design of monetary policy in integrated financial markets is one of the most challenging areas for central banks. One hot topic is whether the increase in liquidity has contributed to the formation of price bubbles in asset markets in the years preceding the financial crisis. If linkages are strong, the inclusion of asset prices in the monetary policy rule may limit speculative runs and negative spillovers to the real economy in the future. To examine the impacts of liquidity shocks on real share and house prices, VAR models are specified for the US and the euro area, as well as global VARs to control for international feedback. The analysis points to some impact of liquidity shocks on house prices, but the effect is restricted to the US. Stock market prices are not affected. Thus, the results suggest that the link between liquidity and asset prices is fragile and far from being obvious.

Suggested Citation

  • Dreger, Christian & Wolters, Jürgen, 2011. "Liquidity and Asset Prices: How Strong Are the Linkages?," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 43-52.
  • Handle: RePEc:zbw:espost:144573
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    Citations

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    Cited by:

    1. Dreger, Christian & Wolters, Jürgen, 2016. "On the Empirical Relevance of the Lucas Critique: the Case of Euro Area Money Demand," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 61-82.
    2. Alexander Chudik & M. Hashem Pesaran, 2016. "Theory And Practice Of Gvar Modelling," Journal of Economic Surveys, Wiley Blackwell, vol. 30(1), pages 165-197, February.
    3. Michael Berlemann & Julia Freese, 2013. "Monetary policy and real estate prices: a disaggregated analysis for Switzerland," International Economics and Economic Policy, Springer, vol. 10(4), pages 469-490, December.
    4. Christian Dreger & Jürgen Wolters, 2011. "Money and Inflation in the Euro Area during the Financial Crisis," Discussion Papers of DIW Berlin 1131, DIW Berlin, German Institute for Economic Research.
    5. Christian Pierdzioch, 2012. "Macroeconomic Factors and the German Real Estate Market: A Stock-Market-Based Forecasting Experiment," Review of Economics & Finance, Better Advances Press, Canada, vol. 2, pages 87-96, May.
    6. Bienert, Sven & Sebastian, Steffen P. & Just, Tobias, . "Niedrigzinsumfeld und die Auswirkungen auf die Immobilienwirtschaft," Beiträge zur Immobilienwirtschaft, University of Regensburg, Department of Economics, number 8, July.

    More about this item

    Keywords

    Liquidity shocks; Asset prices; GVAR analysis; Monetary policy;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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