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

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Author Info
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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Publisher 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
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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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  1. 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. [Downloadable!] (restricted)
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  3. 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. [Downloadable!]
  4. Andrew J. Filardo, 2000. "Monetary policy and asset prices," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 11-37. [Downloadable!]
  5. Bordo, Michael D & Jeanne, Olivier, 2002. "Monetary Policy and Asset Prices: Does 'Benign Neglect' Make Sense?," International Finance, Blackwell Publishing, vol. 5(2), pages 139-64, Summer. [Downloadable!] (restricted)
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  6. Charles Bean, 2003. "Asset Prices, Financial Imbalances and Monetary Policy: Are Inflation Targets Enough?," RBA Annual Conference Volume, in: Anthony Richards & Tim Robinson (ed.), Asset Prices and Monetary Policy Reserve Bank of Australia. [Downloadable!]
    Other versions:
  7. 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. [Downloadable!]
  8. 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. [Downloadable!] (restricted)
  9. Adam S. Posen, 2003. "It Takes More than a Bubble to Become Japan," Peterson Institute Working Paper Series WP03-9, Peterson Institute for International Economics. [Downloadable!]
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  10. Gilchrist, Simon & Leahy, John V., 2002. "Monetary policy and asset prices," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 75-97, January. [Downloadable!] (restricted)
  11. Ben Bernanke & Mark Gertler, 1999. "Monetary policy and asset price volatility," Proceedings, Federal Reserve Bank of Kansas City, pages 77-128. [Downloadable!]
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  12. Anna J. Schwartz, 2002. "Asset Price Inflation and Monetary Policy," NBER Working Papers 9321, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. William R. White & Claudio E. V. Borio, 2004. "Whither monetary and financial stability? the implications of evolving policy regimes," BIS Working Papers 147, Bank for International Settlements. [Downloadable!]
  14. Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements. [Downloadable!]
  15. Carsten Detken & Frank Smets, 2004. "Asset price booms and monetary policy," Working Paper Series 364, European Central Bank. [Downloadable!]
  16. Goodhart, Charles & Hofmann, Boris, 2000. "Do Asset Prices Help to Predict Consumer Price Inflation?," Manchester School, University of Manchester, vol. 68(0), pages 122-40, Supplemen. [Downloadable!] (restricted)
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Cited by:
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  1. Lillian Cheung & Chi-Sang Tam, 2009. "Role of Credit in Equity Market Booms and Busts," Working Papers 0904, Hong Kong Monetary Authority. [Downloadable!]
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