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Measuring the Macroeconomic Risks Posed by Asset Price Booms

In: Asset Prices and Monetary Policy

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  • Stephen G. Cecchetti

Abstract

Modern central bankers are the risk managers of the financial system. They take actions based not only on point forecasts for growth and inflation, but based on the entire distribution of possible macroeconomic outcomes. In numerous instances monetary policymakers have acted in ways designed to avert disasters. What are the implications of this approach for managin the risks posed by asset price booms? To address this question, I study data from a cross-section of countries to examine the impact of equity and property booms on the entire distribution of deviation in output and price-level from their trends. The results suggest that housing booms worsen growth prospects, creating outsized risks of very bad outcomes. By contrast, equity booms have very little impact on the expected mean and variance of macroeconomic performance, but worsen the worst outcomes.

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This chapter was published in:

  • John Y. Campbell, 2008. "Asset Prices and Monetary Policy," NBER Books, National Bureau of Economic Research, Inc, number camp06-1.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 5368.

    Handle: RePEc:nbr:nberch:5368

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    1. Gilbert,Christopher L. & Vines,David (ed.), 2006. "The World Bank," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521029018.
    2. Karl E. Case & John M. Quigley & Robert J. Shiller, 2001. "Comparing Wealth Effects: The Stock Market versus the Housing Market," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1335, Cowles Foundation for Research in Economics, Yale University.
    3. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
    4. Whitney K. Newey & Kenneth D. West, 1986. "A Simple, Positive Semi-Definite, Heteroskedasticity and AutocorrelationConsistent Covariance Matrix," NBER Technical Working Papers 0055, National Bureau of Economic Research, Inc.
    5. Demirguc-Kunt, Asli & Levine, Ross, 1999. "Bank-based and market-based financial systems - cross-country comparisons," Policy Research Working Paper Series 2143, The World Bank.
    6. Gruen, David & Plumb, Michael & Stone, Andrew, 2005. "How Should Monetary Policy Respond to Asset-Price Bubbles?," MPRA Paper 833, University Library of Munich, Germany.
    7. Stephen G. Cecchetti, 2005. "The Brave New World of Central Banking: The Policy Challenges Posed by Asset Price Booms and Busts," Working Papers, Czech National Bank, Research Department 2005/14, Czech National Bank, Research Department.
    8. Ben Bernanke & Mark Gertler, 2000. "Monetary Policy and Asset Price Volatility," NBER Working Papers 7559, National Bureau of Economic Research, Inc.
    9. Stephen G. Cecchetti & Alfonso Flores-Lagunes & Stefan Krause, 2006. "Assessing the Sources of Changes in the Volatility of Real Growth," NBER Working Papers 11946, National Bureau of Economic Research, Inc.
    10. N. Kundan Kishor, 2007. "Does Consumption Respond More to Housing Wealth Than to Financial Market Wealth? If So, Why?," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 35(4), pages 427-448, November.
    11. Ritirupa Samanta & Blake LeBaron, 2005. "Extreme Value Theory and Fat Tails in Equity Markets," Computing in Economics and Finance 2005, Society for Computational Economics 140, Society for Computational Economics.
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