Liquidity Shocks and Asset Price Boom/Bust Cycles

54 Pages Posted: 25 Feb 2007

See all articles by Ramón Adalid

Ramón Adalid

European Central Bank (ECB)

Carsten Detken

European Central Bank (ECB)

Date Written: February 2007

Abstract

We provide systematic evidence for the association of liquidity shocks and aggregate asset prices during mechanically identified asset price boom/bust episodes for 18 OECD countries since the 1970s, while taking care of the endogeneity of money and credit. Our derivation of liquidity shocks allows for frequent shifts in velocity as they are derived as structural shocks from VARs in growth rates. Residential property price developments and money growth shocks accumulated over the boom periods are able to well explain the depth of post-boom recessions. We further suggest that liquidity shocks are a driving factor for real estate prices during boom episodes. During normal times however, the relative predictive power of liquidity shocks seems to shift from asset price inflation to consumer price inflation. The results only hold for broad money growth based liquidity shocks and not for private credit growth shocks.

Keywords: Liquidity shocks, asset price booms, money and credit aggregates, role of money, monetary policy, real estate prices

JEL Classification: C33, E41, E51, E58

Suggested Citation

Adalid, Ramón and Detken, Carsten, Liquidity Shocks and Asset Price Boom/Bust Cycles (February 2007). ECB Working Paper No. 732. Available at SSRN: https://ssrn.com/abstract=963147

Ramón Adalid (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Carsten Detken

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0049 69 1344 6000 (Fax)

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