Global Liquidity and Asset Prices in a Cointegrated VAR

Abstract

This paper investigates the relationship between money/liquidity and asset prices on a global scale: To what extent is global liquidity important? How are interest rates afiected by global monetary conditions? And how does this afiect the ability of central banks to control in∞ation? We flnd evidence for a surge in global liquidity beginning in 2001, which has raised in∞ation rates and house prices, but has had limited efiects on share prices. Furthermore, policy rates have indeed been unusually low given in∞ation levels.