Asset Price Misalignments and the Role of Money and Credit

21 Pages Posted: 7 Jul 2009

See all articles by Dieter Gerdesmeier

Dieter Gerdesmeier

European Central Bank (ECB)

Hans-Eggert Reimers

Hochschule Wismar

Barbara Roffia

European Central Bank (ECB)

Date Written: July 7, 2009

Abstract

This paper contributes to the literature on the properties of money and credit indicators for detecting asset price misalignments. After a review of the evidence in the literature on this issue, the paper discusses the approaches that can be considered to detect asset price busts. Considering a sample of 17 OECD industrialised countries and the euro area over the period 1969 Q1 - 2008 Q3, we construct an asset price composite indicator which incorporates developments in both the stock price and house price markets and propose a criterion to identify the periods characterised by asset price busts, which has been applied in the currency crisis literature. The empirical analysis is based on a pooled probit-type approach with several macroeconomic monetary, financial and real variables. According to statistical tests, credit aggregates (either in terms of annual changes or growth gap), changes in nominal long-term interest rates and investment-to-GDP ratio combined with either house prices or stock prices dynamics turn out to be the best indicators which help to forecast asset price busts up to 8 quarters ahead.

Keywords: Asset prices, house prices, stock prices, financial crisis, asset price busts, probit models, monetary aggregates, credit aggregates

JEL Classification: E37, E44, E51

Suggested Citation

Gerdesmeier, Dieter and Reimers, Hans-Eggert and Roffia, Barbara, Asset Price Misalignments and the Role of Money and Credit (July 7, 2009). European Central Bank Working Paper No. 1068. Available at SSRN: https://ssrn.com/abstract=1429265

Dieter Gerdesmeier (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Hans-Eggert Reimers

Hochschule Wismar ( email )

FB Wirtschaft
Philipp-Mueller-Str. PF 1210
23952 Wismar
Germany
49-3841-753-601 (Phone)
49-3841-753-383 (Fax)

Barbara Roffia

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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