in long-term cycles and are much smoother than stock prices.
In particular, we analyse the impact of a shock to global excess liquidity on a
number of macroeconomic variables. In this way, we are able to isolate the impact of
a shock to global excess liquidity that is arguably purely monetary in nature, after
controlling for the influence of other global variables, notably output and the price
level.
The remainder of this paper applies a global VAR analysis to validate the hy-
pothesis that global monetary conditions systematically drive house prices. This
hypothesis can also be put as a question: Does the probability of house price moves
increase after central banks have changed interest rates and, thus, their money sup-
ply? In other words, we check whether our expectations formulated in chapter 3 can
be backed up by a careful statistical analysis of the data. We proceed as follows:
we first examine in chapter 2 some relationships with the existing literature and
proceed with some theoretical considerations in chapter 3. In chapter 4 we turn to
a more detailed econometric analysis using the VAR technique on a global scale.
To ensure robustness we use different lag lengths, a variety of identification schemes
and we add further variables like a commodity price index. Chapter 5 concludes.
2 Overview of the literature
The concept of ”global excess liquidity” has attracted considerable attention in
recent years, although the empirical literature regarding this topic is still quite
scarce. Only a few other studies apply a research strategy to estimate a global
VAR model which is similar to the one conducted in this paper. Our first reference
study is Rüffer and Stracca (2006). They estimate a VAR model with aggregated
G5 data using the same macroeconomic variables as used here in the benchmark
specification. They identify and address the ”price puzzle”, i.e. the initial increase
of prices as a reaction to a more restrictive monetary policy, and cannot solve it by
applying a commodity price index either. They also augment their model with a real
asset price index that incorporates property and equity prices. The main difference
to our paper is their finding that the response of the price level to a global liquidity