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How should we respond to asset price bubbles?

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  • Mishkin, F S.

Abstract

This paper examines how economic policy should respond to possible asset price bubbles. Three questions are considered: • Are some asset price bubbles more problematic than others? • How should monetary policy respond to asset price bubbles? • What other types of policy responses are appropriate? I conclude that asset price bubbles associated with credit booms present particular challenges because their bursting can lead to episodes of financial instability that have damaging effects on the economy. Monetary policy should not react to asset price bubbles per se, but rather to changes in the outlook for inflation and aggregate demand resulting from asset price movements. However, regulatory policies and supervisory practices should respond to possible asset price bubbles and help prevent feedback loops between asset price bubbles and credit provision, thereby minimising the damaging effects of bubbles on the economy.

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Bibliographic Info

Article provided by Banque de France in its journal Financial stability review.

Volume (Year): (2008)
Issue (Month): 12 (October)
Pages: 65-74

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Handle: RePEc:bfr:fisrev:2008:12:7

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Cited by:
  1. Tobias Adrian & Hyun Song Shin, 2008. "Financial intermediaries, financial stability, and monetary policy," Staff Reports 346, Federal Reserve Bank of New York.
  2. Blinder, Alan S., 2010. "The Squam Lake Report: Fifteen economists in search of financial reform," Journal of Monetary Economics, Elsevier, vol. 57(7), pages 892-902, October.
  3. Nan-Kuang Chen & Han-Liang Cheng & Ching-Sheng Mao, 2011. "House Price, Mortgage Premium, and Business Fluctuations," Working Papers 192011, Hong Kong Institute for Monetary Research.
  4. Lawrence J. White, 2011. "Preventing Bubbles: What Role for Financial Regulation?," Cato Journal, Cato Journal, Cato Institute, vol. 31(3), pages 603-619, Fall.
  5. Charles G. Leathers & J. Patrick Raines, 2012. "Intuitive psychology, natural experiments, and the Greenspan-Bernanke conceptual framework for responding to financial crises," International Journal of Social Economics, Emerald Group Publishing, vol. 39(4), pages 281-295, March.
  6. Erlend Nier, 2009. "Financial Stability Frameworks and the Role of Central Banks," IMF Working Papers 09/70, International Monetary Fund.
  7. Andreas Hoffmann & Gunther Schnabl, 2014. "Monetary Policies of Large Industrialised Countries, Emerging Market Credit Cycles and Feedback Effects," CESifo Working Paper Series 4723, CESifo Group Munich.
  8. Demirguc-Kunt, Asli & Serven, Luis, 2009. "Are All the Sacred Cows Dead? Implications of the Financial Crisis for Macro and Financial Policies," Policy Research Working Paper Series 4807, The World Bank.
  9. Ruthira Naraidoo & Ivan Paya, 2010. "Forecasting Monetary Rules in South Africa," Working Papers 201007, University of Pretoria, Department of Economics.
  10. Milas, Costas & Naraidoo, Ruthira, 2012. "Financial conditions and nonlinearities in the European Central Bank (ECB) reaction function: In-sample and out-of-sample assessment," Computational Statistics & Data Analysis, Elsevier, vol. 56(1), pages 173-189, January.

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