Monetary growth is an indicator of emerging house price bubbles

On reading this Wolfgang Munchau article, I came across this new paper which says Central Banks should look at housing prices. This strand of literature is picking up with many new papers coming on the subject.

Recently IMF WEO April 2008 report said the same. I had argued the same in this paper on 14 Dec 2007.

The new paper which I mention above has done a good amount of econometric research (which was beyond me) and focuses on the developed economies. This piece (in English) from the authors provides a useful. The conclusion is pretty explicit:

Against the background of our results the still high level of global liquidity has to be interpreted as a threat for future stable and low inflation and financial stability. Since global excess liquidity is found to be an important determinant of house prices, there might be at least two implications for the adequate conduct of monetary policy.

First, monetary policy has to be aware of different time lags in the transmission from money to different categories of prices. In particular, strong money growth might be a good indicator of emerging future bubbles in the real estate sector.

Second, house prices might well serve as indicators of future inflationary pressures on goods markets.

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One Response to “Monetary growth is an indicator of emerging house price bubbles”

  1. IMF should call a spade a spade « Mostly Economics Says:

    […] I have noted quite a few flips from IMF when it comes to making a case for developed economies. First was Monetary Policy should look at housing bubbles, second which was even more worrisome was its […]

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