Liquidity Shocks and Asset Price Boom/Bust Cycles

By Ramón Adalid, C. Detken. Social Science Research Network, 2007

239 citations recorded by the source corpus.

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. JEL Classification: C33, E41, E51, E58

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/5e26e0122e092b85111fb7b4e90ed97981421676

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Economics and Econometrics

In Finance

Citations in the corpus

Risk, Uncertainty and Monetary Policy (2013, unknown): “Adrian and Shin (2008) stress the balance sheets of financial intermediaries and repo growth; Adalid and Detken (2007) and Alessi and Detken (2008) stress the buildup of liquidity through money growth and Borio and Lowe (2002) emphasize rapid credit expansion.”
Operationalising the Countercyclical Capital Buffer: Indicator Selection, Threshold Identification and Calibration Options (2014, background): “For example, the money supply might provide additional information because changes in net external assets and marketable instruments, which might affect asset prices, are reflected in money but not in credit (Adalid and Detken, 2007).”
DSGE Models for Monetary Policy Analysis (2010, unknown): “In fact, the typical boom-bust episode is characterized by low or falling inflation (see Adalid & Detken, 2007).”
Liquidity and the Dynamic Pattern of Asset Price Adjustment: A Global View (2010, background): “markets ( Adalid and Detken, 2007, Greiber and Setzer, 2007).”
Working Paper # 0001 January 5 , 2012 A Survey of Systemic Risk Analytics (2012, unknown): “See Adalid and Detken (2007) for a description of the methodology to derive the shocks used to correct these variables.”
Asset Price Misalignments and the Role of Money and Credit (2010, methodology): “It is important to stress that, contrary to Detken and Smets (2004), Adalid and Detken (2007) and the IMF (2008), we do not discriminate between high and low cost booms.”
The EMU sovereign-debt crisis: Fundamentals, expectations and contagion (2012, background): “…fiscal liabilities in January 2010, caused by intra-EMU disagreements regarding the necessity and extent of a Greek a bail-out.12 This 11 See Adalid and Detken (2007) and Belke et al. (2010), among others, for empirical analyses that identify a link between global liquidity and financial…”
The Global Financial Crisis: Causes and Cures (2009, unknown): “A new literature has recently tried to identify quantitative indicators to anticipate financial crises (Borio and Lowe 2002, Adalid and Detken 2007, Alessi and Detken (2009), Gerdesmeier, Reimers and Roffia 2009).”
The Great Recession: US dynamics and spillovers to the world economy (2012, methodology): “The specification of the model in (1)-(5) embeds a set of important assumptions on the structure of linkages across countries: (i) US idiosyncratic shocks (v  ) do not only affect the US economy (through D()), but also have spillovers on foreign countries (through D ()); (ii) differently, for”
Economic crisis in Europe : causes, consequences and responses (2011, background): “((32)) See for recent evidence Adalid and Detken (2006), Ahrend et al. (2008) and Belke et al.”