greater synchronization in asset markets. global shocks ( for example, from oil prices and geopolitical risk factors ) that produce broadly similar effects on most economies may have become more prevalent and may tend to dominate idiosyncratic national shocks. but it also is quite possible that greater international diversification of portfolios now allows developments affecting assets in one country to spill over into markets of others - both at the level of particular industries and more broadly. if synchronization of asset price movements comes about mainly in this way, the suggestion is that excess liquidity in one country could move asset prices in another, perhaps significantly, even if liquidity was well contained in the latter. 12 in the somewhat longer run, patterns of aggregate saving - influenced, for example, by demographic developments - may also affect the path of real interest rates and, in turn, prices of assets, again complicating interpretation of co - movements. for instance, an increase in savings as a growing share of the population nears retirement may reduce real rates and raise asset prices. patterns of immigration that affect the population's demographic profile, too, can affect asset prices. in the united states, we have seen some of these effects in certain segments of the housing market. conclusions in summary, although excess liquidity has been cited as a source of general asset price instability, the support for this conclusion is mixed, at best. we do find a positive correlation between growth rates of real house prices and m3, but the correlation does not seem to hold for real asset prices more generally - including, in particular, equities. in this talk, i have suggested that we are only at the beginning of an understanding of some of these relationships. even if an underlying causal link exists between some real asset prices and liquidity, many additional factors may be influencing what we see, with potential for misleading us in interpreting simple associations or correlations. the problem obviously is complex. as a start, however, we need a better understanding of how asset prices are determined that can be translated into guidance for a policy process that uses real - time variables. to borrow a turn of phrase cited often in the physical sciences, theory tends to " explain a complex visible, with a simple invisible. " 13 in the realm of policy, of course, we need to work with simple, but reliable visibles - a requirement that makes this task all the more challenging. for that reason, i have been pleased to join this group of

measured narrowly as central bank money, for example, or more broadly to reflect the multiplier effects of the financial system ; sometimes it is measured instead by the level of policy interest rates. all these definitions and others have been in play in the economics profession's analysis of the link between monetary conditions and asset prices. what is meant by " excessive " is even less well defined. some commentators have taken a circular approach : if monetary conditions were comparatively easy when asset prices experienced a significant swing, then liquidity must have been " excessive. " a good place to start to unravel some of these issues is to look at the data. the results of research at the board and that of many others seeking to document a link between liquidity and swings in asset prices has focused on growth rates of broad monetary aggregates and measures of equity and house prices deflated by the price index for personal consumption expenditures. 1 using these measures, the results differ significantly according to the type of asset being studied. for equity prices, under various alternative specifications, the link between the growth rate of liquidity and changes in real equity prices at frequencies beyond very short term appears to be tenuous at best. 2 to illustrate, the upper panel of figure 1 shows a scatter plot of contemporaneous four - quarter growth rates of m3 and changes in broad measures of equity prices for sixteen industrial countries during roughly the past twenty - five years. 3 as you can see, no obvious sign of a meaningful correlation at this frequency is evident in this pattern. indeed, the actual correlation is slightly negative. most other studies - such as the study by bordo and wheelock - using a variety of definitions and more - rigorous techniques, support the same conclusion. 4 the lack of a strong finding of any positive medium - to longer - run relationship, of course, could be because equity prices are quite volatile, making unconditional correlation difficult to identify. perhaps, too, more - refined measures of liquidity than those used in studies so far are needed to capture possible effects on equity prices. so the effect of money growth on real equity prices is by no means a closed question, and there certainly would be interest in whatever might come from further research on this topic. in contrast, the link between monetary growth, as measured by m3, and changes in real house prices appears to be more definite. the bottom panel of figure 1 shows a similar scatter plot for the same group of countries and periods as in the upper