Global Monetary Policy Shocks in the G5: A Svar Approach

Sowing the seeds for the subprime crisis: does global liquidity matter for housing and other asset prices?

“…result to be in support of the hypothesis that the influence of money on inflation has a long-term characteristic. In the case of the interest rate shock, the reaction of the price level yields the 'price puzzle,' which often occurs in the VAR analysis and was also experienced by Rüffer and Stracca (2006) as well as Sousa and Zaghini (2006) in the same context. The appearance of the price puzzle is sometimes thought to be caused by the lack of a variable which captures inflationary expectations.…”

“…Therefore, it is recommended by Favero (2001) to use a commodity price index that might capture inflationary expectations to some degree and solve this problem. However, considering this alternative and adding a commodity price index (or, alternatively, the price of oil) into our model did not solve the price puzzle [Rüffer and Stracca (2006), Sousa and Zaghini (2006)]. There will be further discussion of the implausible reaction of inflation to interest rate changes in the context of the following empirical models, where the house price index helps us to solve the price puzzle.…”

“…Another relevant study is Sousa and Zaghini (2006) who estimate a VAR model for the G5 with aggregated data. Moreover, they include a commodity price index and deviate from the standard Cholesky identification scheme in restricting the structural equations.…”

“…Sousa and Zaghini (2006) argue that global aggregates are likely to internalize cross-country movements in monetary aggregates-due to capital flows between the different regions-that may make the link between money and inflation and output more difficult to disentangle in the single country case. Giese and Tuxen (2007) further argue that in today's linked financial markets shifts in the money supply in one country may be absorbed by demand elsewhere, but simultaneous shifts in major economies may have significant effects on worldwide goods price inflation.…”

“…However, in this paper we investigate the extent and some specific macroeconomic impacts of global liquidity with an eye on identifying its interactions with global inflation and asset prices, as suggested by a number of authors such as Baks and Kramer (1999), Sousa and Zaghini (2006) and Rüffer and Stracca (2006). We feel legitimized to focus on a global model and, hence, do not explicitly deal with any spillovers to national variables.…”