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Inflation targeting, asset prices and financial imbalances: conceptualizing the debate

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  • Piti Disyatat

    (Bank of Thailand)

Abstract

This paper attempts to conceptualize the debate regarding the role of asset prices and perceived financial imbalances in the formation of monetary policy from the perspective of theoretically optimal policy responses. While much of the disagreement can be reconciled within the framework of flexible inflation targeting, defined as a commitment to a targeting rule, preemptive policy actions against the build-up of financial imbalances cannot be motivated within such a framework without modification either to the targeting rule or the underlying model. Given standard forecasting models, such actions are shown to be operationally equivalent to targeting financial imbalances explicitly in the central bank loss function.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 168.

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Length: 39 pages
Date of creation: Jan 2005
Date of revision:
Handle: RePEc:bis:biswps:168

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Keywords: Inflation targeting; financial imbalances; policy horizon; asset prices;

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References

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  1. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  2. Svensson, L-E-O, 1996. "Inflation Forecast Targeting : Implementaing and Monitoring Inflation Targets," Papers 615, Stockholm - International Economic Studies.
  3. Borio, Claudio, 2006. "Monetary and financial stability: Here to stay?," Journal of Banking & Finance, Elsevier, vol. 30(12), pages 3407-3414, December.
  4. Laurence Ball, 1997. "Efficient rules for monetary policy," Reserve Bank of New Zealand Discussion Paper Series G97/3, Reserve Bank of New Zealand.
  5. Lars E.O. Svensson & Michael Woodford, 2004. "Implementing Optimal Policy through Inflation-Forecast Targeting," NBER Chapters, in: The Inflation-Targeting Debate, pages 19-92 National Bureau of Economic Research, Inc.
  6. Charles Bean, 2003. "Asset prices, financial imbalances and monetary policy: are inflation targets enough?," BIS Working Papers 140, Bank for International Settlements.
  7. Claudio E. V. Borio & Wiliam English & Andrew Filardo, 2003. "A tale of two perspectives: old or new challenges for monetary policy?," BIS Working Papers 127, Bank for International Settlements.
  8. Batini, Nicoletta & Nelson, Edward, 2000. "Optimal Horizons for Inflation Targeting," Working Paper Series 103, Sveriges Riksbank (Central Bank of Sweden).
  9. David Gruen & Michael Plumb & Andrew Stone, 2003. "How Should Monetary Policy Respond to Asset-price Bubbles?," RBA Annual Conference Volume, in: Anthony Richards & Tim Robinson (ed.), Asset Prices and Monetary Policy Reserve Bank of Australia.
  10. Svensson, Lars E O, 2004. "Optimal Policy with Low-Probability Extreme Events," CEPR Discussion Papers 4218, C.E.P.R. Discussion Papers.
  11. Lars E. O. Svensson, 2003. "What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 426-477, June.
  12. Stephen G. Cecchetti & Hans Genberg & Sushil Wadhwani, 2002. "Asset Prices in a Flexible Inflation Targeting Framework," NBER Working Papers 8970, National Bureau of Economic Research, Inc.
  13. 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.
  14. Ben S. Bernanke & Mark Gertler, 2001. "Should Central Banks Respond to Movements in Asset Prices?," American Economic Review, American Economic Association, vol. 91(2), pages 253-257, May.
  15. Claudio Borio & William R. White, 2003. "Whither monetary and financial stability : the implications of evolving policy regimes," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 131-211.
  16. Michael Woodford, 2004. "Inflation targeting and optimal monetary policy," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 15-42.
  17. Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements.
  18. Claudio E. V. Borio & Philip Lowe, 2004. "Securing sustainable price stability: should credit come back from the wilderness?," BIS Working Papers 157, Bank for International Settlements.
  19. Detken, Carsten & Smets, Frank, 2004. "Asset price booms and monetary policy," Working Paper Series 0364, European Central Bank.
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Citations

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Cited by:
  1. Vítor, Castro, 2011. "Can central banks' monetary policy be described by a linear (augmented) Taylor rule or by a nonlinear rule?," Journal of Financial Stability, Elsevier, vol. 7(4), pages 228-246, December.
  2. Grossi, Michele & Tamborini, Roberto, 2011. "Stock prices and monetary policy: Re-examining the issue in a New Keynesian model with endogenous investment," Economics Discussion Papers 2011-54, Kiel Institute for the World Economy.
  3. Andrew Filardo & Guonan Ma & Dubravko Mihaljek, 2011. "Exchange rate and monetary policy frameworks in EMEs," BIS Papers chapters, in: Bank for International Settlements (ed.), Capital flows, commodity price movements and foreign exchange intervention, volume 57, pages 37-63 Bank for International Settlements.
  4. Itai Agur & Maria Demertzis, 2013. ""Leaning Against the Wind" and the Timing of Monetary Policy," IMF Working Papers 13/86, International Monetary Fund.
  5. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2013. "Rethinking Inflation Targeting: A Perspective from the Developing World," Centre for Growth and Business Cycle Research Discussion Paper Series 185, Economics, The Univeristy of Manchester.
  6. Christophe Blot & Jérôme Creel & Fabien Labondance & Francesco Saraceno & Paul Hubert, 2014. "Assessing the link between Price and Financial Stability," Sciences Po publications 2014-02, Sciences Po.
  7. Roseline Nyakerario Misati & Esman Morekwa Nyamongo & Lucas Kamau Njoroge & Sheila Kaminchia, 2012. "Feasibility of inflation targeting in an emerging market: evidence from Kenya," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 4(2), pages 146-159, June.
  8. Adolfo Barajas & Roberto Steiner & Leonardo Villar & Cesar Pabon, 2014. "Inflation Targeting in Latin America," Research Department Publications IDB-WP-473, Inter-American Development Bank, Research Department.
  9. Claudio Borio & Frank Piti Disyatat & Mikael Juselius, 2013. "Rethinking potential output: Embedding information about the financial cycle," BIS Working Papers 404, Bank for International Settlements.
  10. Misati, Roseline Nyakerario & Nyamongo, Esman Morekwa, 2012. "Financial liberalization, financial fragility and economic growth in Sub-Saharan Africa," Journal of Financial Stability, Elsevier, vol. 8(3), pages 150-160.
  11. Itai Agur & Maria Demertzis, 2010. "Monetary Policy and Excessive Bank Risk Taking," DNB Working Papers 271, Netherlands Central Bank, Research Department.
  12. Kajuth, Florian, 2010. "The role of liquidity constraints in the response of monetary policy to house prices," Journal of Financial Stability, Elsevier, vol. 6(4), pages 230-242, December.
  13. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2013. "Inflation Targeting and Financial Stability: A Perspective from the Developing World," Working Papers Series 324, Central Bank of Brazil, Research Department.
  14. Meixing DAI & Eleftherios SPYROMITROS, 2008. "Monetary policy, asset prices and model uncertainty," Working Papers of BETA 2008-15, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  15. Mara Pirovano, 2013. "Household and firm leverage, capital flows and monetary policy in a small open economy," Working Paper Research 246, National Bank of Belgium.
  16. Vicente da Gama Machado, 2012. "Monetary Policy, Asset Prices and Adaptive Learning," Working Papers Series 274, Central Bank of Brazil, Research Department.

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