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Global Excess Liquidity and House Prices - A VAR Analysis for OECD Countries

  • Ansgar Belke

    ()

  • Walter Orth

The belief that house prices are driven by specific regional and institutional variables and not at all by monetary conditions is so entrenched with some market participants and some commentators that the search for empirical support would seem to be a trivial task. However, this is not the case. This paper investigates the relationship between global excess liquidity and asset prices on a global scale:How important is global liquidity? How are asset (especially house) prices and other important macro variables like consumer prices affected by global monetary conditions? This paper analyses the international transmission of monetary shocks with a special focus on the effects of a global monetary aggregate ("global liquidity") on consumer prices and different asset prices.We estimate a variety of VAR models for the global economy using aggregated data that represent the major OECD countries. The impulse responses show that a positive shock to global liquidity leads to permanent increases in the global GDP deflator and in the global house price index, while the latter reaction is even more distinctive. Moreover, we find that there are subsequent spillovers to consumer prices. In contrast, we are not able to find empirical evidence in favour of the hypothesis that the MSCIWorld index as a measure of stock prices significantly reacts to changes in global liquidity.

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Paper provided by Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen in its series Ruhr Economic Papers with number 0037.

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Length: 30 pages
Date of creation: Dec 2007
Date of revision:
Handle: RePEc:rwi:repape:0037
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  1. Frederic S. Mishkin, 2007. "Housing and the Monetary Transmission Mechanism," NBER Working Papers 13518, National Bureau of Economic Research, Inc.
  2. Balazs Egert & Dubravko Mihaljek, 2007. "Determinants of House Prices in Central and Eastern Europe," William Davidson Institute Working Papers Series wp894, William Davidson Institute at the University of Michigan.
  3. Favero, Carlo A., 2001. "Applied Macroeconometrics," OUP Catalogue, Oxford University Press, number 9780198296850, March.
  4. Ciccarelli, Matteo & Mojon, Benoît, 2005. "Global inflation," Working Paper Series 0537, European Central Bank.
  5. Kenneth S. Rogoff, 2003. "Globalization and global disinflation," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 77-112.
  6. Sousa, Joao Miguel & Zaghini, Andrea, 2007. "Global monetary policy shocks in the G5: A SVAR approach," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 17(5), pages 403-419, December.
  7. Goodhart, Charles & Hofmann, Boris, 2000. "Do Asset Prices Help to Predict Consumer Price Inflation?," Manchester School, University of Manchester, vol. 68(0), pages 122-40, Supplemen.
  8. Rüffer, Rasmus & Stracca, Livio, 2006. "What is global excess liquidity, and does it matter?," Working Paper Series 0696, European Central Bank.
  9. Beyer, Andreas & Doornik, Jurgen A & Hendry, David F, 2001. "Constructing Historical Euro-Zone Data," Economic Journal, Royal Economic Society, vol. 111(469), pages F102-21, February.
  10. 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).
  11. Adalid, Ramón & Detken, Carsten, 2007. "Liquidity shocks and asset price boom/bust cycles," Working Paper Series 0732, European Central Bank.
  12. 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.
  13. Roffia, Barbara & Zaghini, Andrea, 2007. "Excess money growth and inflation dynamics," Working Paper Series 0749, European Central Bank.
  14. 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.
  15. Pesaran, M. H. & Shin, Y., 1997. "Generalised Impulse Response Analysis in Linear Multivariate Models," Cambridge Working Papers in Economics 9710, Faculty of Economics, University of Cambridge.
  16. Pietro Catte & Nathalie Girouard & Robert W.R. Price & Christophe André, 2004. "Housing Markets, Wealth and the Business Cycle," OECD Economics Department Working Papers 394, OECD Publishing.
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