A Tale of Five Bubbles- Asset Price Inflation and Central Bank Policy in Historical Perspective
AbstractThis paper examines five bubbles that eventually popped, and discuses the feasibility of central bank policy. In all cases, we find that monetary policy was too loose during the period when the bubble was developing, and that a determined switch from an accommodating to a tight stance caused "the music to stop". We argue that despite the severe real effects of asset bubbles in all five examples, the case for targeting them explicitly is weak. Policy was flawed because it failed to pay sufficient attention to the output gap. We also present a more formal test, showing that policy errors influence the conditional volatility of equity returns as estimated in GARCH-M models. The conclusion examines US policy today in the light of our historical findings.
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Bibliographic InfoPaper provided by Centre for Economic Policy Research, Research School of Economics, Australian National University in its series CEPR Discussion Papers with number 416.
Length: 29 pages
Date of creation: May 2000
Date of revision:
CENTRAL BANKS ; FINANCIAL POLICY ; ECONOMIC MODELS;
Find related papers by JEL classification:
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
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