Liquidity, Inflation and Asset Prices in a Time-Varying Framework for the Euro Area

Transcription

1 Lqudy, Inflaon and Asse Prces n a Tme-Varyng Framework for he Euro Area Chrsane Baumeser Evelne Durnck Ger Peersman Ghen Unversy

2 Movaon One pllar of ECB polcy sraegy: money aggregaes as an ndcaor of rsks o prce sably Has been subjec o nense crcsm Gerlach (2004) and Hofmann (2006): dsorons of relaonshp beween money growh and nflaon over me ECB: no mechancal reacon bu a comprehensve assessmen of he lqudy suaon based on nformaon abou he balance shee conex as well as he composon of M3 growh Gerlach (2007) and Fscher, Lenza, Pll and Rechln (2008): here s a reacon, bu also depends on nformaon from he economc analyss Lnk beween excess lqudy and fuure nflaon s probably no consan over me and depends on oher facors as well

3 Movaon Moneary analyss could provde early nformaon on emergng fnancal mbalances (asse prce bubbles) Chrsano, Moo and Rosagno (2006): heorecal suppor for correlaon beween srong cred growh and boombus epsodes n asse prces Deken and Smes (2004): hgh-cos booms n asse prces ofen follow rapd growh n money and cred socks Also epsodes n hsory where excess money growh s no followed by fnancal mbalances Growng leraure whch shows ha he mpac depends on he underlyng sae of he economy Asse prce boom-buss, fnancal lberalzaon, busness cycle, Informaon of lqudy for asse prces s probably also no consan over me and sae dependen

4 Ths paper Invesgaes he lnk beween money, economc acvy, asse prces and nflaon n a me-varyng and sae dependen framework for he Euro area SVAR o esmae he mpac of lqudy shock Benchmark Dsncon beween he source of ncreased lqudy (M1, M3-M1 and cred) Tme-varyng effecs of lqudy shocks on he economy A smple sample spl (md-eghes) BVAR wh me-varyng parameers and sochasc volaly Lqudy shocks and he sae of he economy Does he mpac depend on he sae of he economy (asse prce boom-buss, busness cycle, cred cycle, moneary polcy, )?

5 Impac of lqudy shocks Benchmark SVAR for he perod 1971Q1-2005Q4 Real GDP growh, HICP nflaon, neres rae, real asse prces growh and money growh (M3) Aggregae asse prces, propery prces and equy prces Recursve denfcaon: exogenous shocks o lqudy whch are no relaed o endogenous developmens due o busness or asse prce cycles ( excess lqudy lke money overhang)

6 Impac of lqudy shocks 1% long-run rse n M3 Temporary posve effec on real GDP Impac on prces s less han proporonal: here s a permanen rse of real money holdngs oupu prces real M

7 Impac of lqudy shocks 1% long-run rse n M3 Sgnfcan posve mpac on real asse, propery and equy prces real asse prces real propery prces real equy prces

8 Impac of lqudy shocks Dsncon beween shocks o M1, M3-M1 and cred Rse n M1 has a proporonal mpac on prces and a consderable effec on oupu (spendng ndcaor) M3-M1 has a much lower effec on oupu and prces: here s a permanen rse n real money holdngs (change n porfolo preferences) oupu prces real M1 or M3-M M1 M3-M1 M1 M3-M1 M1 M3-M1

9 Impac of lqudy shocks Dsncon beween shocks o M1, M3-M1 and cred Impac of shock n counerpar cred s smlar as M3, excep a sronger effec on oupu No noceable dfferences for mpac on real asse prces oupu prces real M3 or cred M3 cred M3 cred M3 cred

10 Tme varyng effecs of lqudy shocks A smple sample spl Pre and pos 1985 Bayesan VAR wh me-varyng parameers and sochasc volaly In he spr of Cogley and Sargen (2002, 2005), Prmcer (2005), Bena and Mumaz (2007) Allows for smooh ransons over me and capures possble nonlneares Volaly of lqudy shocks s allowed o change over me (heeroscedascy of he shocks) Noe: s used as a ranng sample o calbrae he prors

11 Tme varyng effecs of lqudy shocks Impac on oupu s sgnfcanly smaller for pos 1985 perod, bu rses agan durng ceran perods Impac on oupu afer 4 quarers Q1 1975Q1 1979Q1 1983Q1 1987Q1 1991Q1 1995Q1 1999Q1 2003Q1 sample spl BVAR-TVP

12 Tme varyng effecs of lqudy shocks (near) proporonal mpac on prces before early 1980s whle more permanen effec on real money holdngs aferwards Bu: mpac on nflaon s also varyng over me wh noceable ncreased mpac n more recen perod Long-run mpac on prces Long-run mpac on real money Q1 1975Q Q1 1983Q1 1987Q Q1 1995Q1 1999Q Q Q1 1975Q Q1 1983Q1 1987Q Q1 1995Q1 1999Q Q1 sample s pl TVP-BVAR sample s pl TVP-BVAR

13 Tme varyng effecs of lqudy shocks Tme-varaon for asse prces no very clear nomnal asse prces real asse prces percen me horzon percen me horzon nomnal propery prces real propery prces 1 percen percen me horzon me horzon nomnal equy prces real equy prces 0 0 percen -1 percen me horzon me horzon

14 Lqudy and he sae of he economy Growng leraure argung ha he mpac depends on he underlyng sae of he economy whch can also affec he me-varyng resuls We consder 5 regmes smulaneously Sngle equaon approach for oupu growh, nflaon, nomnal and real asse prce growh k j n lq j j n lq n k j n lq j j n lq n n lq n u sae y C y u sae y C y u y C y Δ + = Δ Δ + = Δ + + Δ + = Δ = = = = = = = = = = 1 1 1, , ε γ β ε λ α ε γ β ε λ α β ε λ α

15 Lqudy and he sae of he economy Asse prce booms and buss Bank behavor changes n asse prce booms Herrng and Wacher (2003) and Adran and Shn (2008) Rsng bank capal and sronger balance shees of banks: more wllng o hold loans and possbles for addonal lendng Value of collaeral on ousandng loans rses, reducng he rsk on exsng porfolo: more addonal lendng possble Behavoral characerscs of bankng secor (e.g. moral hazard) Self-renforcng process va he fnancal acceleraor (asse prces as collaeral), wealh effecs, Tobn s q channel Emprcally confrmed by Adald and Deken (2007) and Goodhar and Hofmann (2007) n cross secon dmenson Asse prce boom regme: when real aggregae asse prce ndex exceeds s rend by more han 10% for a leas hree quarers

16 Lqudy and he sae of he economy Asse prce booms and buss: resuls Sronger mpac on oupu, nflaon and real asse prces No sgnfcan for propery prces Also sronger effec on oupu and real asse prces n a bus Includng propery prces Economcally very relevan! Real asse prces Prces Oupu apboom apboom apboom

17 Lqudy and he sae of he economy Busness cycle Fnancal acceleraor weaker n booms: less exernal fnancng, hgh collaeral and cash-flow values Bernanke and Gerler (1989) Weaker effec on economc acvy and prces Convex shor-run aggregae supply curve Weaker effec on economc acvy + sronger effec on prces Peersman and Smes (2002): oupu effecs of moneary polcy sronger n recessons Economc boom: when real GDP growh s above s rend for a leas hree quarers

18 Lqudy and he sae of he economy Busness cycle Weaker mpac on oupu n economc booms Conssen wh fnancal acceleraor (-) and convex supply (-) No asymmery for nflaon and equy prces Fnancal acceleraor (-) and convex supply (+) cancellng each oher ou? Sronger mpac on propery prces Domnance of convex supply curve (+) n propery marke? Economcally also very mporan Oupu Prces Real equy prces Real propery prces cyc le cycle cyc le cyc le

19 Lqudy and he sae of he economy Fnancal deregulaon and lberalzaon Safes segmen of borrowers shfs away from he bankng secor owards he capal and sock markes Srenghens he fnancal acceleraor channel: search for new cusomers leads banks o smaller and rsker borrowers whch ncreases he mporance of collaeral Confrmed by evdence of Boro, Kennedy and Prowse (1994), Goodhar, Hofmann and Segovano (2004) and Calza, Monacell and Sracca (2006) Cred boom: mnmum hree quarers n whch money/cred o GDP rao grows faser han s rend

20 Lqudy and he sae of he economy Fnancal deregulaon and lberalzaon Sronger effec on oupu and all ypes of asse prces Inflaon depends on he specfcaon Economcally very mporan Oupu Real asse prces Prces cred cred cred

21 Lqudy and he sae of he economy Inflaon regmes Boro and Lowe (2002) and Boro (2006): mproved cenral bank credbly and ncreased globalzaon could reduce he mpac of lqudy shocks on nflaon, whch could nsead be ranslaed no hgher asse prces Goodhar and Hofmann (2007): ncreased responsveness of asse prces over me Gerlach (2004) and our resuls: reduced mpac on nflaon over me Inflaon boom: nflaon s a leas hree quarers hgher han s rend value Resuls No robus asymmery

22 Lqudy and he sae of he economy Moneary polcy sance & posve versus negave lqudy shocks Resrcve moneary polcy sance mples weak balance shees of frms and a sronger fnancal acceleraor Balke (2000), Aanasova (2003) and Calza and Sousa (2005): sronger oupu and nflaon effecs a mes of gh polcy Smlar reasonng o expec sronger effecs of negave lqudy shocks relave o posve lqudy shocks (because lqudy consrans more bndng) Convex shor-run aggregae supply curve also predcs sronger oupu effecs bu a weaker mpac on prces Cover (1992): sronger effecs of negave money supply shocks Olner and Rudebush (1995): fnancal acceleraor s sronger afer resrcve moneary polcy shocks Resrcve moneary polcy: when acual neres rae s hgher han neres rae obaned from Taylor rule

23 Lqudy and he sae of he economy Moneary polcy sance & posve versus negave lqudy shocks Resrcve moneary polcy sance Somewha sronger effec on oupu and asse prces bu no robus Weaker mpac on nflaon bu economcally relave small Negave versus posve lqudy shocks Negave shocks have sgnfcan sronger effecs on oupu and all ypes of asse prces Weaker effec on nflaon Economcally relevan asymmery Oupu Real asse prces Prces negave negave negave

24 Conclusons Economc consequences depend on he source of lqudy shock M1: proporonal effec on prces and srong effec reacon M3-M1: much lower mpac on oupu and prces: here s a permanen rse n real money holdngs Impac s me-varyng and depends on sae of he economy Sronger effecs durng asse prce booms and buss Weaker mpac on oupu and sronger mpac on propery prces n economc booms Sronger effec on oupu and asse prces n cred booms Negave shocks o lqudy have sgnfcan sronger effecs on oupu and asse prces whle mpac on nflaon s weaker