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

area.

3 Theoretical considerations

3.1 The global perspective

If one considers the development of global liquidity over time, the question is often
raised whether and to what extent global factors can be made responsible for it.
Rüffer and Stracca (2006) investigate this important aspect for the G7 countries in
the framework of a factor analysis and conclude that around fifty percent of the
variance of a narrow monetary aggregate can be traced back to one common global
factor. As one prominent example of such a global factor for instance the extremely
lax monetary policy stance of the Bank of Japan (BoJ) during the last years should
be mentioned here. It has been characterised by a significant accumulation of foreign
reserves and by extremely low interest rates - at some time even approaching zero.
By means of carry trades, financial investors took out loans in Japan which they
invested in currencies with higher interest rates. In our context, it is important to
note that such kind of capital transactions of course also have an impact on the
development of monetary aggregates beyond Japan. In addition, we would like to
argue that national monetary aggregates have become more difficult to interpret due
to the huge increase of international capital flows (Papademos, 2007).

Exactly this problem of increasing difficulties of interpreting national monetary
aggregates properly is also addressed by some other authors. Sousa and Zaghini
(2006) argue that global aggregates are likely to internalize cross-country move-
ments in monetary aggregates - due to capital flows between the different regions
- that may make the link between money and inflation and output more difficult
to disentangle in the single country case. Moreover, Giese and Tuxen (2007) stress
the fact that shifts in the money supply in any one country may be absorbed by
demand elsewhere in today’s linked financial markets, but simultaneous shifts in
major economies may have significant effects on worldwide goods price inflation.

Not only with respect to global liquidity but also with an eye on global infla-
tion performance, available evidence becomes increasingly stronger that the global

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