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Optimal interest rate policy during asset price booms: The mirage of 'benign neglect'

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Author Info

  • Berger, Wolfram
  • Ki[beta]mer, Friedrich

Abstract

We show that a policy of 'benign neglect' towards an asset price boom is not a sensible option when expectations are forward-looking. Policymakers choose between a policy that cuts real interest rates and one that raises them during asset price booms.

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File URL: http://www.sciencedirect.com/science/article/B6V84-4T8YNBN-1/2/0f15f8efa2260fe32602ab4b65e68f55
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Bibliographic Info

Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 101 (2008)
Issue (Month): 3 (December)
Pages: 265-267

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Handle: RePEc:eee:ecolet:v:101:y:2008:i:3:p:265-267

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Web page: http://www.elsevier.com/locate/ecolet

Related research

Keywords: Monetary policy Asset prices Credit crunch Boom bust cycles Forward-looking behavior;

References

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  1. Detken, Carsten & Smets, Frank, 2004. "Asset price booms and monetary policy," Working Paper Series 0364, European Central Bank.
  2. Ben Bernanke & Mark Gertler, 1999. "Monetary policy and asset price volatility," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 17-51.
  3. Charles Bean, 2003. "Asset prices, financial imbalances and monetary policy: are inflation targets enough?," BIS Working Papers 140, Bank for International Settlements.
  4. Adam S. Posen, 2006. "Why Central Banks Should Not Burst Bubbles," Working Paper Series WP06-1, Peterson Institute for International Economics.
  5. Nouriel Roubini, 2006. "Why Central Banks Should Burst Bubbles," International Finance, Wiley Blackwell, vol. 9(1), pages 87-107, 05.
  6. Michael D. Bordo & Olivier Jeanne, 2002. "Boom-Busts in Asset Prices, Economic Instability, and Monetary Policy," NBER Working Papers 8966, National Bureau of Economic Research, Inc.
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Cited by:
  1. Berger, Wolfram & KiƟmer, Friedrich, 2013. "Central bank independence and financial stability: A tale of perfect harmony?," European Journal of Political Economy, Elsevier, vol. 31(C), pages 109-118.

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