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Global liquidity, house prices and the macroeconomy: evidence from advanced and emerging economies

Author

Listed:
  • Cesa-Bianchi, Ambrogio

    () (Bank of England)

  • Cespedes, Luis

    () (Universidad Adolfo Ibanez)

  • Rebucci, Alessandro

    () (Johns Hopkins University Carey Business School)

Abstract

In this paper we first compare house price cycles in advanced and emerging economies using a new quarterly house price data set covering the period 1990-2012. We find that house prices in emerging economies grow faster, are more volatile, less persistent and less synchronised across countries than in advanced economies. We also find that they correlate with capital flows more closely than in advanced economies. We then condition the analysis on an exogenous change to a particular component of capital flows: global liquidity, broadly understood as a proxy for the international supply of credit. We identify this shock by aggregating bank-to-bank cross-border credit flows and by using the external instrumental variable approach introduced by Stock and Watson and Mertens and Ravn. We find that in emerging markets a global liquidity shock has a much stronger impact on house prices and consumption than in advanced economies. We finally show that holding house prices constant in response to this shock tends to dampen its effects on consumption in both advanced and emerging economies, but possibly through different channels: in advanced economies by boosting the value of housing collateral and hence supporting domestic borrowing; in emerging markets, by appreciating the exchange rate and hence supporting the international borrowing capacity of the economy.

Suggested Citation

  • Cesa-Bianchi, Ambrogio & Cespedes, Luis & Rebucci, Alessandro, 2015. "Global liquidity, house prices and the macroeconomy: evidence from advanced and emerging economies," Bank of England working papers 522, Bank of England.
  • Handle: RePEc:boe:boeewp:0522
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Capital flows; emerging markets; global liquidity; house prices; external instrumental variables;

    JEL classification:

    • 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
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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