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

44 Pages Posted: 23 Feb 2015

See all articles by Ambrogio Cesa-Bianchi

Ambrogio Cesa-Bianchi

Bank of England

Luis Céspedes

Adolfo Ibanez University

Alessandro Rebucci

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

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Date Written: January 2015

Abstract

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

Cesa-Bianchi, Ambrogio and Cespedes, Luis and Rebucci, Alessandro, Global Liquidity, House Prices, and the Macroeconomy: Evidence from Advanced and Emerging Economies (January 2015). IMF Working Paper No. 15/23. Available at SSRN: https://ssrn.com/abstract=2568598

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 Cespedes

Adolfo Ibanez University ( email )

Diagonal Las Torres 2640 Peñaleón
Presidente Errázuriz 3485 Las Condes
Santiago, 794-1169
Chile

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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