Global Liquidity, House Prices and the Macroeconomy: Evidence from Advanced and Emerging Economies

43 Pages Posted: 25 Jan 2015

See all articles by Ambrogio Cesa-Bianchi

Ambrogio Cesa-Bianchi

Bank of England

Luis Felipe Cespedes

International Monetary Fund (IMF)

Alessandro Rebucci

Johns Hopkins University - Carey Business School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: January 23, 2015

Abstract

In this paper we first compare house price cycles in advanced and emerging economies using a new quarterly house price data set covering the period 1990-2012. We find that house prices in emerging economies grow faster, are more volatile, less persistent and less synchronised across countries than in advanced economies. We also find that they correlate with capital flows more closely than in advanced economies. We then condition the analysis on an exogenous change to a particular component of capital flows: global liquidity, broadly understood as a proxy for the international supply of credit. We identify this shock by aggregating bank-to-bank cross-border credit flows and by using the external instrumental variable approach introduced by Stock and Watson and Mertens and Ravn. We find that in emerging markets a global liquidity shock has a much stronger impact on house prices and consumption than in advanced economies. We finally show that holding house prices constant in response to this shock tends to dampen its effects on consumption in both advanced and emerging economies, but possibly through different channels: in advanced economies by boosting the value of housing collateral and hence supporting domestic borrowing; in emerging markets, by appreciating the exchange rate and hence supporting the international borrowing capacity of the economy.

Keywords: Capital flows, emerging markets, global liquidity, house prices, external instrumental variables

JEL Classification: C32, E44, F44

Suggested Citation

Cesa-Bianchi, Ambrogio and Cespedes, Luis Felipe and Rebucci, Alessandro, Global Liquidity, House Prices and the Macroeconomy: Evidence from Advanced and Emerging Economies (January 23, 2015). Bank of England Working Paper No. 522. Available at SSRN: https://ssrn.com/abstract=2554501 or http://dx.doi.org/10.2139/ssrn.2554501

Ambrogio Cesa-Bianchi (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

HOME PAGE: http://https://sites.google.com/site/ambropo/

Luis Felipe Cespedes

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Alessandro Rebucci

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

HOME PAGE: http://carey.jhu.edu/faculty-research/faculty-directory/alessandro-rebucci-phd

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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