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

of global liquidity on house prices and more general inflation. However, their study is
still in progress and so we might be cautious with an interpretation of these results.

In this paper, we focus on a global model. However, we do not explicitly deal
with spillovers to national variables. We feel legitimised to do so because - ac-
cording to recent research - inflation appears to be a global phenomenon. For in-
stance, Ciccarelli and Mojon (2005) cannot empirically reject the existence of an
error-correction mechanism between national and global inflation. Hence, one can
conclude that deviations from the global inflation trend are not sustainable in the
long run. In addition, we would like to refer also to Borio and Filardo (2007) who
show that a more globe-centric approach to inflation is by far more adequate, be-
cause global factors have become increasingly relevant for empirical realisations of
national inflation rates.

As it was just said, the focus of our paper is clearly on the global perspective.
However, given recent findings that inflation might be an increasingly global phe-
nomenon, the potential threats for future price stability which can be derived from
the evidence of this paper and the related literature seem to be also relevant on a
country level. Note also, that several country-level studies that include asset prices
find empirical evidence in a similar direction.¹ These studies basically support in
some way one of the major findings of our paper, namely that global liquidity fu-
els house price inflation and that there might be subsequent spillovers to consumer
prices.

Finally, we would like to address one of the most recent country-level studies
in this field, namely Roffia and Zaghini (2007). Using probit regressions for 15
countries, they find evidence in favour of the hypothesis that periods of strong
monetary growth are likely to turn into periods of high inflation, especially if they
are accompanied by asset price inflation. Given the fact that both conditions fit
quite well to the situation observed on the world financial markets at least until
spring 2007, this scenario has most probably contributed to the more recent positive
trend of inflation rates observed in the second half of 2007 for instance in the Euro
¹See Goodhart and Hofmann (2000), Greiber and Setzer (2007), Adalid and Detken (2007),
Congdon (2005) or Roffia and Zaghini (2007).

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