Ambrogio Cesa-Bianchi and Alessandro Rebucci

In some parts of the emerging world, housing markets have grown well ahead of income in recent years.  Will a US monetary policy normalisation bring about a correction in house prices as the search for yield unwinds and capital flows back to the US?  Looking at the past through the prism of a structural VAR, we think the answer is “yes it will”.  Shocks to global liquidity have much larger effects on house prices in emerging markets than in advanced world economies. A tightening in global liquidity conditions also leads to a rapid capital account reversal, exchange rate depreciation and hence a sharp fall in consumption.

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