Global Liquidity, House Prices, and the Macroeconomy: Evidence from Advanced and Emerging Economies
44 Pages Posted: 23 Feb 2015
Date Written: January 2015
In this paper we first compare house price cycles in advanced and emerging economies using anew 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 synchronized 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. We find that a global liquidity shock, identified by aggregating bank-to-bank cross border flows and by using the external instrumental variable approach of Stock and Watson (2012) and Mertens and Ravn (2013), has a much stronger impact on house prices and consumption in emerging markets than in advanced economies. In our empirical model, holding house prices or the exchange rate constant in response to this shock tends to dampen its effects on consumption in emerging economies.
Keywords: Housing prices, Business cycles, Capital flows, International liquidity, Emerging markets, Developed countries, global liquidity, house prices, external instrumental variables, economies, advanced economies, exchange rate, consumption, collateral, price inflation, financial crisis, equilibrium, currency, general equilibrium, general equilibrium models, exchange rate channel, current account, long-term interest rates, international borrowing, real exchange rate, risk, supply, imbalances, exchange rate appreciations, market economies, current account response, investment opportunities, consumption growth, exchange rates, external shocks, asset, emerging market economies, financial crises, mone
JEL Classification: C32, E44, F44
Suggested Citation: Suggested Citation