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Monetary policy and financial imbalances: facts and fiction

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  • Katrin Assenmacher-Wesche
  • Stefan Gerlach

Abstract

"Following the financial crisis, many have argued that monetary policy should lean against asset price increases and that deviations of credit and asset prices from trend can be used to capture financial imbalances. We study quarterly data spanning 1986-2008 for a sample of 18 countries and argue that such measures contain little information useful for forecasting the future economic conditions. This casts doubts on the leaning-against-the-wind view. We also argue that tightening monetary policy in response to such imbalances are likely to depress real growth substantially. That finding, however, is sensitive to the Lucas critique." Copyright (c) CEPR, CES, MSH, 2010.

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Bibliographic Info

Article provided by CEPR & CES & MSH in its journal Economic Policy.

Volume (Year): 25 (2010)
Issue (Month): (07)
Pages: 437-482

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Handle: RePEc:bla:ecpoli:v:25:y:2010:i::p:437-482

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References

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  1. Gerlach, Stefan & Peng, Wensheng, 2005. "Bank lending and property prices in Hong Kong," Journal of Banking & Finance, Elsevier, vol. 29(2), pages 461-481, February.
  2. Boris Hofmann, 2003. "Bank Lending and Property Prices: Some International Evidence," Working Papers 222003, Hong Kong Institute for Monetary Research.
  3. Arturo Estrella & Frederic S. Mishkin, 1996. "Predicting U.S. recessions: financial variables as leading indicators," Research Paper 9609, Federal Reserve Bank of New York.
  4. Pesaran, M.H. & Smith, R., 1992. "Estimating Long-Run Relationships From Dynamic Heterogeneous Panels," Cambridge Working Papers in Economics 9215, Faculty of Economics, University of Cambridge.
  5. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
  6. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
  7. Franck Portier & Aude Pommeret & Olivier Loisel, 2008. "Monetary policy and herd behavior in new-tech investment," 2008 Meeting Papers 444, Society for Economic Dynamics.
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Cited by:
  1. Pierre-Richard AGENOR & Luiz A. PEREIRA DA SILVA, 2011. "Macroeconomic Stability, Financial Stability, and Monetary Policy Rules," Working Papers P29, FERDI.
  2. Jane Dokko & Brian M. Doyle & Michael T. Kiley & Jinill Kim & Shane Sherlund & Jae Sim & Skander Van Den Heuvel, 2011. "Monetary policy and the global housing bubble," Economic Policy, CEPR & CES & MSH, vol. 26(66), pages 233-283, 04.
  3. Isabel Marques Gameiro & Carla Soares & João Sousa, 2011. "Monetary policy and financial stability: an open debate," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
  4. Philip R. Lane, 2011. "External Imbalances and Macroeconomic Policy in New Zealand," The Institute for International Integration Studies Discussion Paper Series iiisdp376, IIIS.
  5. Gunther Tichy, 2011. "Why did policy ignore the harbingers of the crisis?," Empirica, Springer, vol. 38(1), pages 107-130, February.
  6. Lars E. O. Svensson, 2011. "Practical Monetary Policy: Examples from Sweden and the United States," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(1 (Spring), pages 289-352.
  7. Philip Lane, 2010. "Some Lessons for Fiscal Policy from the Financial Crisis," The Institute for International Integration Studies Discussion Paper Series iiisdp334, IIIS.
  8. Claudio Borio, 2011. "Rediscovering the macroeconomic roots of financial stability policy: journey, challenges and a way forward," BIS Working Papers 354, Bank for International Settlements.
  9. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2013. "Inflation Targeting and Financial Stability: A Perspective from the Developing World," Working Papers Series 324, Central Bank of Brazil, Research Department.
  10. Fischbacher, Urs & Hens, Thorsten & Zeisberger, Stefan, 2013. "The impact of monetary policy on stock market bubbles and trading behavior: Evidence from the lab," Journal of Economic Dynamics and Control, Elsevier, vol. 37(10), pages 2104-2122.

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