Advanced Search
MyIDEAS: Login to save this paper or follow this series

Asset price booms and monetary policy

Contents:

Author Info

  • Detken, Carsten
  • Smets, Frank

Abstract

The paper aims at deriving some stylised facts for financial, real, and monetary policy developments during asset price booms by means of aggregating information contained in 38 boom periods since the 1970s for 18 OECD countries. We observe 26 macroeconomic variables in a pre-boom, boom and post-boom phase. Not all booms lead to large output losses. We divide our sample in high-cost and low-cost booms and analyse the differences. High-cost booms are clearly those in which real estate prices and investment crash in the post-boom periods. In general it is difficult to distinguish a highcost from a low-cost boom at an early stage. However, high-cost booms seem to follow very rapid growth in the real money and real credit stocks just before the boom and at the early stages of a boom. During high-cost booms, rates of change of real estate prices and consumption growth are significantly higher and the investment (especially housing) GDP ratio deviation from trend rises faster over the whole boom period. There is also evidence that high-cost booms are associated with significantly looser monetary policy conditions over the boom period, especially towards the late stage of a boom. We finally discuss the results with regard to the theoretical literature. The looser monetary policy at the later stage of high-cost booms could be interpreted in different ways. It could be that excessively loose monetary policy contributes to extending the boom and exacerbating the real and financial imbalances. Alternatively, observed monetary policy could reflect a desirable, pre-emptive loosening in anticipation of an asset price crash to come. JEL Classification: E44, E52, E58

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp364.pdf
Download Restriction: no

Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0364.

as in new window
Length:
Date of creation: May 2004
Date of revision:
Handle: RePEc:ecb:ecbwps:20040364

Contact details of provider:
Postal: Postfach 16 03 19, Frankfurt am Main, Germany
Phone: +49 69 1344 0
Fax: +49 69 1344 6000
Web page: http://www.ecb.europa.eu/home/html/index.en.html
More information through EDIRC

Order Information:
Postal: Press and Information Division, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany
Email:

Related research

Keywords: and monetary policy developments; real; The paper aims at deriving some stylised facts for financial;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Christopher Kent & Philip Lowe, 1997. "Asset-price Bubbles and Monetary Policy," RBA Research Discussion Papers rdp9709, Reserve Bank of Australia.
  2. Michael D. Bordo & Olivier Jeanne, 2002. "Boom-Busts in Asset Prices, Economic Instability, and Monetary Policy," NBER Working Papers 8966, National Bureau of Economic Research, Inc.
  3. Pierre-Olivier Gourinchas & Rodrigo Valdes & Oscar Landerretche, 2001. "Lending Booms: Latin America and the World," JOURNAL OF LACEA ECONOMIA, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
  4. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
  5. Gilchrist, Simon & Leahy, John V., 2002. "Monetary policy and asset prices," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 75-97, January.
  6. Ehrmann, Michael & Smets, Frank, 2003. "Uncertain potential output: implications for monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 27(9), pages 1611-1638, July.
  7. Ricardo J. Caballero & Arvind Krishnamurthy, 2003. "Inflation Targeting and Sudden Stops," NBER Working Papers 9599, National Bureau of Economic Research, Inc.
  8. 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.
  9. Allen, Franklin & Gale, Douglas, 2000. "Bubbles and Crises," Economic Journal, Royal Economic Society, vol. 110(460), pages 236-55, January.
  10. David Gruen & Michael Plumb & Andrew Stone, 2003. "How Should Monetary Policy Respond to Asset-price Bubbles?," RBA Research Discussion Papers rdp2003-11, Reserve Bank of Australia.
  11. Ludger Schuknecht & Albert Jaeger, 2004. "Boom-Bust Phases in Asset Prices and Fiscal Policy Behavior," IMF Working Papers 04/54, International Monetary Fund.
  12. Eugene White & Frederic Mishkin, 2002. "U.S.Stock Market Crashes and Their Aftermath: Implications for Monetary Policy," Departmental Working Papers 200208, Rutgers University, Department of Economics.
  13. Dupor, Bill, 2005. "Stabilizing non-fundamental asset price movements under discretion and limited information," Journal of Monetary Economics, Elsevier, vol. 52(4), pages 727-747, May.
  14. Regina Kaiser & Agustín Maravall, 1999. "Estimation of the Business Cycle: a Modified Hodrick-Prescott Filter," Banco de Espa�a Working Papers 9912, Banco de Espa�a.
  15. repec:fth:baesse:9912 is not listed on IDEAS
  16. Claudio Borio & William English & Andrew Filardo, 2003. "A tale of two perspectives: old or new challenges for monetary policy?," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 1-59 Bank for International Settlements.
  17. Brousseau, Vincent & Detken, Carsten, 2001. "Monetary policy and fears of financial instability," Working Paper Series 0089, European Central Bank.
  18. Dupor, Bill, 2002. "Comment on: Monetary policy and asset prices," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 99-106, January.
  19. Michael Bordo & Barry Eichengreen & Daniela Klingebiel & Maria Soledad Martinez-Peria, 2001. "Is the crisis problem growing more severe?," Economic Policy, CEPR & CES & MSH, vol. 16(32), pages 51-82, 04.
  20. Miller, Marcus & Weller, Paul & Zhang, Lei, 2001. "Moral Hazard and the US Stock Market: The Idea of a 'Greenspan Put'," CEPR Discussion Papers 3041, C.E.P.R. Discussion Papers.
  21. Olivier Jeanne & Michael D. Bordo, 2002. "Monetary Policy and Asset Prices," IMF Working Papers 02/225, International Monetary Fund.
  22. Narayana R. Kocherlakota, 2000. "Creating business cycles through credit constraints," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-10.
  23. 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.
  24. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
Full references (including those not matched with items on IDEAS)

Citations

RePEc Biblio mentions

As found on the RePEc Biblio, the curated bibliography for Economics:
  1. > Macroeconomics > Monetary Theory
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:ecb:ecbwps:20040364. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Official Publications).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.