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Monetary Policy, Asset Prices and Macro-economic Conditions: A Panel VAR Study

Monetary Policy, Asset Prices and Macro-economic Conditions: A Panel VAR Study by K. Assenmache-Wesche and S. Gerlach Discussion by C. Goodhart The exercise is a study of inter-relationships, using a Panel VAR approach, amongst aggregate economic variables and asset prices in 17 countries.

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Monetary Policy, Asset Prices and Macro-economic Conditions: A Panel VAR Study

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  1. Monetary Policy, Asset Prices and Macro-economic Conditions: A Panel VAR Study by K. Assenmache-Wesche and S. Gerlach Discussion by C. Goodhart The exercise is a study of inter-relationships, using a Panel VAR approach, amongst aggregate economic variables and asset prices in 17 countries. Complements and extends Goodhart and Hofmann (2008) by including equity prices and slightly different econometric techniques. Broadly welcome.

  2. Econometric Nit-Picks • Mean Group estimators vs Fixed Effect estimators. • Property prices I 2, i.e. level of property prices non-stationary. Surely there has to be a long run (cointegrating) relationship between property prices and nominal incomes. • A short sample problem?

  3. General Problems of both papers • Short sample, late 1980s boom, 1990-92 recession, 1992-2006 Golden Age. Adding 2007-9 may make a large difference. • The Rudebusch critique of VARs. Re-estimate using Luca Benati time-varying coefficients. • Bank credit (especially in USA) not adjusted for originate to distribute and securitisation. • Property prices slow to adjust to credit. Even slower in downturn. Transactions rather than prices?

  4. Policy Issues • Do not use interest rates to stabilise asset prices. Use other macro-prudential, counter-cyclical instruments. What are they? • Outline future expectations for policy rates? Woodford vs Shin. • The importance of housing (Ed Leamer). Check momentum trading, (public sector enters foreclosure sales: enforce maximum LTV in upturn).

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