This paper examines the relation between money and housing variables in the euro area and in the US. Our empirical model is based on a standard money demand relation which is augmented by housing market variables. In doing so, co-integrated money demand relationships can be established for both the euro area and the US. Furthermore, we find evidence for asset inflation channels, that is, liquidity fuels housing market developments. JEL Classification: E41, E52Keywords: money demand, asset inflation, housing, wealth Non technical summaryThis paper examines both for the euro area and the US the relationship between monetary developments and the housing market, i.e. whether booms on real estate markets can be influenced by expansionary monetary policy or whether rising house prices may contribute to strong monetary growth. From a theoretical point of view, multiple interdependencies between money and the housing sector can be identified. A surge in house prices may trigger a rise in the demand for money due to an increase in net household wealth or due to higher transaction volume on housing and construction markets. Causality could also run from monetary developments to the housing market if an expansionary monetary policy provides excess liquidity and thereby causes asset inflation. In addition, developments in the housing market have important implications for the lending behaviour of banks since higher house prices increase the collateral values of homes and improve home owners' access to loans, thereby fostering credit and money growth.In order to gauge the links between money and housing empirically, we augment a standard money demand function with variables representing developments in the housing sector (property prices and property wealth). Moreover, to obtain further insights into the relationship between developments in the housing sector and money, we enrich our benchmark specification by variables representing financing conditions. We find strong evidence for the notion that the recent surge in house prices and the loose monetary conditions are related phenomena. Both for the euro area and the US significant bidirectional links between money and housing can be identified. The inclusion of variables representing developments in the housing sector helps to explain the dynamics of money. In contrast to conventional money demand specifications a cointegrated money demand relationship can be established for the euro area and the US up to the fourth quarter of 2006. In addition, there is also strong evidence that monetary policy influences housing market developments by improving financing conditions, thereby increasing demand for housing.

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