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Asset prices and monetary policy: booms and fat tails in East Asia

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  • Maria Socorro Gochoco-Bautista

Abstract

Do housing and equity booms significantly raise the probability of extremely bad outcomes at the margin? This study addresses this question for a group of 8 East Asian countries. The main findings are the following: (i) Asset price booms in housing and equity markets, either separately or jointly but especially in housing, significantly raise the probability at the margin that (a) the real output gap will be in the left tail of its distribution, in which output is significantly below trend, and (b) the price-level gap will be in the right tail of its distribution, in which the price level is significantly above trend. At the margin, the risk of the occurrence of these particular tail events due to asset price booms is largely asymmetric and does not apply to the tails of good outcomes; and (ii) Expected real output and price level outcomes that are either obtained without conditioning on asset price booms or are obtained conditional on asset price booms using the normal approximation underestimate the risk of tail events and lead to less pessimistic but misleading inferences. One implication for monetary policy is that an approach that is ex-ante more compatible with risk management may be appropriate.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 243.

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Length: 50 pages
Date of creation: Jan 2008
Date of revision:
Handle: RePEc:bis:biswps:243

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Related research

Keywords: asset price booms; tails; GDP-at-risk; CPI-at-risk; risk management;

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References

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  1. Claudio Borio & Patrick McGuire, 2004. "Twin peaks in equity and housing prices?," BIS Quarterly Review, Bank for International Settlements, March.
  2. Stephen G. Cecchetti, 2008. "Measuring the Macroeconomic Risks Posed by Asset Price Booms," NBER Chapters, in: Asset Prices and Monetary Policy, pages 9-43 National Bureau of Economic Research, Inc.
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  5. Adam S. Posen, 2003. "It Takes More than a Bubble to Become Japan," Working Paper Series WP03-9, Peterson Institute for International Economics.
  6. 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.
  7. Ben Bernanke & Mark Gertler, 1999. "Monetary policy and asset price volatility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 77-128.
  8. Anna J. Schwartz, 2002. "Asset Price Inflation and Monetary Policy," NBER Working Papers 9321, National Bureau of Economic Research, Inc.
  9. Detken, Carsten & Smets, Frank, 2004. "Asset price booms and monetary policy," Working Paper Series 0364, European Central Bank.
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  11. Cecchetti, Stephen G. & Kashyap, Anil K, 1996. "International cycles," European Economic Review, Elsevier, vol. 40(2), pages 331-360, February.
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  13. Gilchrist, Simon & Leahy, John V., 2002. "Monetary policy and asset prices," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 75-97, January.
  14. 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.
  15. Claudio E. V. Borio, 2006. "Monetary and prudential policies at a crossroads? New challenges in the new century," BIS Working Papers 216, Bank for International Settlements.
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  17. Bordo, Michael D & Jeanne, Olivier, 2002. "Monetary Policy and Asset Prices: Does 'Benign Neglect' Make Sense?," International Finance, Wiley Blackwell, vol. 5(2), pages 139-64, Summer.
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Cited by:
  1. Kim, Soyoung & Yang, Doo Yong, 2008. "The Impact of Capital Inflows on Emerging East Asian Economies: Is Too Much Money Chasing Too Little Good?," Working Papers on Regional Economic Integration 15, Asian Development Bank.
  2. Pontines, Victor, 2013. "How Useful Is an Asian Currency Unit (ACU) Index for Surveillance in East Asia?," ADBI Working Papers 413, Asian Development Bank Institute.
  3. Lillian Cheung & Chi-Sang Tam, 2009. "Role of Credit in Equity Market Booms and Busts," Working Papers 0904, Hong Kong Monetary Authority.

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