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



subsequent analysis in which the additional inclusion of asset price variables might
strengthen the explanatory power of the global model.

Augmenting the VAR with asset prices

The next step in the VAR analysis is to allow for the first asset price variable to
enter the model. We start with the house price index (HPI), since - according to
section 3 - house prices may play a crucial role in this context. In the Cholesky
ordering, we put house prices just behind the GDP deflator, so that we are working
with the following vector of endogenous variables:

xt = (y p hpi IS m)t

Response of Y to IS                             Response of P to IS                            Response of HPI to IS                            Response of M to IS

.006-
.004-
.002-
.000-
-.002-
-.004-



.006

.004

.002

.000

-.002

-.004


.012

.008

.004

.000

-.004

-.008

-.012


.008


.004

.000

-.004

-.008


Response of Y to M


Response of P to M

.006

.004

.002

.000

-.002

-.004

.012

-.008-

-.012


Response of HPI to M

Response of IS to M

.4-

.008

.004

.000

-.004

-.4-

2   4   6   8  10 12 14 16 18 20

2   4   6   8   10 12 14 16 18 20


2   4   6   8  10 12 14 16 18 20           2   4   6   8   10 12 14 16 18 20           2   4   6   8  10 12 14 16 18 20           2   4   6   8   10 12 14 16 18 20

.006-
.004-
.002-
.000-
-.002-
-.004-

2   4   6   8  10 12 14 16 18 20           2   4   6   8   10 12 14 16 18 20


Response of Y to HPI

4   6   8  10 12 14 16 18 20


Response of P to HPI

.006

.004

.002

.000

-.002

-.004

2   4   6   8   10 12 14 16 18 20


Response of IS to HPI                           Response of M to HPI

.4 --------------------------------------------------- .008--

-.2-                                                                        -.004-

-.4   .................. -.008   ..................

2    4    6   8   10 1 2 1 4 16 1 8 20             2    4   6   8   10 1 2 1 4 16 18 20

Figure 4: Impulse response analysis; basic model augmented with house prices


Figure 4 shows in the first row the effects from a positive shock to the short-
term interest rate. Like in the benchmark model, this kind of shock causes output
and money to decline, while the latter becomes significant at the 5% level here.
Moreover, the ”price puzzle” disappears which supports the view that house prices

19



More intriguing information

1. Estimating the Impact of Medication on Diabetics' Diet and Lifestyle Choices
2. Heterogeneity of Investors and Asset Pricing in a Risk-Value World
3. The name is absent
4. AGRICULTURAL TRADE IN THE URUGUAY ROUND: INTO FINAL BATTLE
5. On Evolution of God-Seeking Mind
6. The name is absent
7. Connectionism, Analogicity and Mental Content
8. The name is absent
9. The Triangular Relationship between the Commission, NRAs and National Courts Revisited
10. Banking Supervision in Integrated Financial Markets: Implications for the EU