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Should Monetary Policy respond to Asset Price Bubbles? Revisiting the Debate

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  • Sushil Wadhwani

Abstract

We argue that central banks can improve macroeconomic performance by reacting to asset price misalignments over and above their reaction to fixed horizon inflation forecasts. This is because such countercyclical monetary policy tends to offset the impact on output and inflation of such bubbles. In addition, if it were know ex ante that monetary policy would LATW in this way, it might reduce the probability of bubbles arising at all.

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This chapter was published in:

  • John P. Calverley & Fernando Restoy & Jesper Ulriksen Thuesen & Andrea Vivoli & Sushil Wadhwani & Axel A. Weber, 2008. "Monetary Policy, Regulation and Volatile Markets," SUERF Studies, SUERF - The European Money and Finance Forum, number 2008/4 edited by Morten Balling & Ernest Gnan & Catherine Lubochinsky.
    This item is provided by SUERF - The European Money and Finance Forum in its series Chapters in SUERF Studies with number 51-3.

    Handle: RePEc:erf:erfssc:51-3

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    1. Orazio Mastroeni, 2001. "Pfandbrief-style products in Europe," BIS Papers chapters, in: Bank for International Settlements (ed.), The changing shape of fixed income markets: a collection of studies by central bank economists, volume 5, pages 44-66 Bank for International Settlements.
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    Cited by:
    1. Pierre-Richard Agenor & Koray Alper & Luiz Pereira da Silva, 2012. "Capital Regulation, Monetary Policy and Financial Stability," Working Papers 1228, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    2. Grydaki, Maria & Bezemer, Dirk, 2013. "The role of credit in the Great Moderation: A multivariate GARCH approach," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4615-4626.
    3. Otaviano Canuto, 2011. "How Complementary Are Prudential Regulation and Monetary Policy?," World Bank Other Operational Studies 10089, The World Bank.
    4. Filardo, Andrew & Genberg, Hans, 2010. "Monetary Policy Strategies in the Asia and Pacific Region: What Way Forward?," ADBI Working Papers 195, Asian Development Bank Institute.
    5. Paul Wachtel, 2011. "Central Banking for the 21st Century: An American Perspective," Working Papers 11-02, New York University, Leonard N. Stern School of Business, Department of Economics.
    6. Phillip Anthony O’Hara, 2011. "International Subprime Crisis and Recession: Emerging Macroprudential, Monetary, Fiscal and Global Governance," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 58(1), pages 1-17, March.

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