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Can Global Liquidity Forecast Asset Prices?

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Executive Summary

During the period leading up to the global financial crisis many asset classes registered rapid price increases. This coincided with a significant rise in global liquidity. This paper attempts to determine the extent to which the rise in asset prices was influenced by developments in global liquidity. The authors confirm that global liquidity had a significant impact on the buildup in house prices; however, the impact on equity prices was limited. In contrast to common perception, they find that the impact of global liquidity declined during the period of the Great Moderation.

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