Asset price misalignments and the role of money and credit

Dieter Gerdesmeier, Barbara Roffia and Hans-Eggert Reimers

No 1068, Working Paper Series from European Central Bank

Abstract: This paper contributes to the literature on the properties of money and credit indicators for detecting asset price misalignments. After a review of the evidence in the literature on this issue, the paper discusses the approaches that can be considered to detect asset price busts. Considering a sample of 17 OECD industrialised countries and the euro area over the period 1969 Q1 - 2008 Q3, we construct an asset price composite indicator which incorporates developments in both the stock price and house price markets and propose a criterion to identify the periods characterised by asset price busts, which has been applied in the currency crisis literature. The empirical analysis is based on a pooled probit-type approach with several macroeconomic monetary, financial and real variables. According to statistical tests, credit aggregates (either in terms of annual changes or growth gap), changes in nominal long-term interest rates and investment-to-GDP ratio combined with either house prices or stock prices dynamics turn out to be the best indicators which help to forecast asset price busts up to 8 quarters ahead. JEL Classification: E37, E44, E51

Keywords: asset price busts; Asset Prices; credit aggregates; financial crisis; house prices; monetary aggregates; probit models; stock prices (search for similar items in EconPapers)
Date: 2009-07
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-ure
Note: 190719
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (46)

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Journal Article: Asset Price Misalignments and the Role of Money and Credit (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20091068

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