Ansgar Belke and Walter Orth*
Global Excess Liquidity and House Prices -
A VAR Analysis for OECD Countries
Abstract
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 sup-
port 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 af-
fected 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 as-
set prices. We estimate a variety of VAR models for the global economy using
aggregated data that represent the major OECD countries. The impulse re-
sponses show that a positive shock to global liquidity leads to permanent in-
creases 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 MSCI World index as a
measure of stock prices significantly reacts to changes in global liquidity.
JEL Classification: E31, E52, F01, F42
Keywords: Global liquidity, inflation control, international spillovers, asset
prices, VAR analysis
December 2007
* Ansgar Belke, University of Duisburg-Essen and IZA Bonn; Walter Orth, University of
Duisburg-Essen. - We are grateful for the hospitality of the Deutsche Bundesbank granted to the
second author during his research stay at this institution. We would like to thank Ralph Setzer for
helpful comments on the first draft of this paper. - All correspondence to Professor Dr. Ansgar
Belke, University of Duisburg-Essen, Department of Economics, D-45117 Essen, Germany,
e-mail: [email protected]
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