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Should the Fed take deliberate steps to deflate asset price bubbles?

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Author Info
Timothy Cogley

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Abstract

On several occasions over the last few years, various economists and policymakers have expressed the opinion that the stock market was overvalued. They often compared the situation with the 1920s and warned that the U.S. economy was headed for a similar collapse. Some analysts also suggested that the Fed raise interest rates to slow the rate of "asset inflation," on the grounds that it would be better to burst a speculative bubble in its early stages than to let it develop and suffer the inevitable crash. This paper takes up the other side of the debate and argues that deliberate attempts to puncture asset price bubbles may well turn out to be destabilizing. ; Identification of asset price bubbles requires more knowledge about asset price fundamentals than central banks possess, and the inability to identify speculative bubbles makes it difficult to take timely and well-measured countervailing actions.

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Publisher Info
Article provided by Federal Reserve Bank of San Francisco in its journal Economic Review.

Volume (Year): (1999)
Issue (Month): ()
Pages: 42-52
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Handle: RePEc:fip:fedfer:y:1999:p:42-52:n:1

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Keywords: Stock market Board of Governors of the Federal Reserve System (U.S.)

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Hamilton, James D. & Whiteman, Charles H., 1985. "The observable implications of self-fulfilling expectations," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 353-373, November. [Downloadable!] (restricted)
  2. Hansen, Lars Peter & Richard, Scott F, 1987. "The Role of Conditioning Information in Deducing Testable," Econometrica, Econometric Society, vol. 55(3), pages 587-613, May. [Downloadable!] (restricted)
  3. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March. [Downloadable!] (restricted)
  4. Hamilton, James D., 1987. "Monetary factors in the great depression," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 145-169, March. [Downloadable!] (restricted)
  5. Olivier J. Blanchard, 1993. "Movements in the Equity Premium," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(1993-2), pages 75-138. [Downloadable!]
  6. Manuel S. Santos & Michael Woodford, 1997. "Rational Asset Pricing Bubbles," Econometrica, Econometric Society, vol. 65(1), pages 19-58, January.
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  7. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-48, April.
    Other versions:
  8. John Y. Campbell, Robert J. Shiller, 1988. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 1(3), pages 195-228. [Downloadable!] (restricted)
    Other versions:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Carsten Detken & Vincent Brousseau, 2001. "Monetary policy and fears of financial instability," Working Paper Series 089, European Central Bank. [Downloadable!]
  2. Fernando Alexandre & Pedro Bação, 2002. "Equitity prices and Monetary Policy: An Overview with an Exploratory Model," NIPE Working Papers 1/2002, NIPE - Universidade do Minho. [Downloadable!]
    Other versions:
  3. Fernando Alexandre & Pedro Bação, 2005. "Monetary policy and asset prices: the investment channel," NIPE Working Papers 3/2005, NIPE - Universidade do Minho. [Downloadable!]
  4. Gerhard Illing, 2001. "Financial Fragility, Bubbles and Monetary Policy," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  5. H. Genberg, 2001. "Asset Prices, Monetary Policy and Macroeconomic Stability," DNB Staff Reports (discontinued) 64, Netherlands Central Bank. [Downloadable!]
  6. Rudiger Dornbusch, 1999. "Commentary : monetary policy and asset market volatility," Proceedings, Federal Reserve Bank of Kansas City, pages 129-135. [Downloadable!]
  7. Andrew J. Filardo, 2001. "Should monetary policy respond to asset price bubbles? : some experimental results," Research Working Paper RWP 01-04, Federal Reserve Bank of Kansas City. [Downloadable!]
  8. Hui S. Chang, 2005. "Estimating the Monetary Policy Reaction Function for Taiwan: A VAR Model," The International Journal of Applied Economics, Department of General Business, Southeastern Louisiana University, vol. 2(1), pages 50-61, March. [Downloadable!]
  9. Dor, Eric & Durré, Alain, 1999. "Stock Prices, Exchange Rates and Monetary Policy," Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) Discussion Paper 2000001, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES). [Downloadable!]
  10. Helmut Wagner & Wolfram Berger, 2003. "Financial Globalization and Monetary Policy," DNB Staff Reports (discontinued) 95, Netherlands Central Bank. [Downloadable!]
  11. Helmut Wagner, 2001. "Implications of Globalization for Monetary Policy," IMF Working Papers 01/184, International Monetary Fund. [Downloadable!]
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