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

5 Conclusions

So does the inclusion of house prices help to restore a significant monetary transmis-
sion process from global excess liquidity to macro variables? And more specifically:
does global liquidity spill over to house prices? The main empirical results of our pa-
per in this respect are the following: At a global level, we find further support to the
conjecture that monetary aggregates may convey some useful information on vari-
ables such as house prices which matter for aggregate demand and hence inflation.
Thus, we conclude that excess liquidity is a useful indicator of house price inflation
and of a more generally defined inflationary pressure at a global level. Therefore
we would like to argue that global liquidity merits some attention in the same way
as the worldwide level of interest rates as in the recent hot debate about the world
savings versus liquidity glut, if not possibly more.

The still high level of global liquidity can be seen as a threat for future inflation
and financial stability. Since global excess liquidity is found to be an important
determinant regarding house prices there might be at least two implications. First,
monetary policy has to be aware of likely spill-overs from housing to consumer
prices resulting from the hausse in the real estate sector which might continue due
to excess liquidity. Secondly, when house prices reach an unsustainable level and a
potential bubble is created, this means risks not only for price stability but also for
the economy as a whole - as seen in the current subprime crisis which apparently has
partly spread from the US to other parts of the world. We also see some implications
for policy makers. In the first place, our VAR analysis indicates that house prices
might well serve as indicators of future inflationary pressures. Moreover, strong
monetary growth might be a good indicator of emerging bubbles in the real estate
sector.

We see two potential ways to reduce the world excess liquidity. The first is a
tightening of monetary policy oriented at the development of the world’s nominal
income. This strategy will not solve the current problem immediately but should
diminish the long-run risks. Moreover, fostering strong global economic growth will
dampen negative effects especially with respect to potentially bursting bubbles.

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