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Should Monetary Policy Respond to Asset Price Bubbles? Revisiting the Debate

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  • Sushil Wadhwani

Abstract

We argue that central banks can improve macroeconomic performance by reacting to asset price misalignments over and above their reaction to fixed horizon inflation forecasts. This is because such countercyclical monetary policy tends to offset the impact on output and inflation of such bubbles. In addition, if it were know ex ante that monetary policy would LATW in this way, it might reduce the probability of bubbles arising at all.

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File URL: http://www.lse.ac.uk/fmg/documents/specialPapers/2008/sp180.pdf
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Bibliographic Info

Paper provided by Financial Markets Group in its series FMG Special Papers with number sp180.

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Date of creation: Jun 2008
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Handle: RePEc:fmg:fmgsps:sp180

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Web page: http://www.lse.ac.uk/fmg/

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  1. Orazio Mastroeni, 2001. "Pfandbrief-style products in Europe," BIS Papers chapters, in: Bank for International Settlements (ed.), The changing shape of fixed income markets: a collection of studies by central bank economists, volume 5, pages 44-66 Bank for International Settlements.
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Cited by:
  1. Grydaki, Maria & Bezemer, Dirk, 2013. "The role of credit in the Great Moderation: A multivariate GARCH approach," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4615-4626.
  2. Pierre-Richard Agénor & K. Alper & Luiz A. Pereira da Silva, 2011. "Capital Regulation, Monetary Policy and Financial Stability," Working Papers Series, Central Bank of Brazil, Research Department 237, Central Bank of Brazil, Research Department.
  3. Andrew Filardo & Hans Genberg, 2010. "Monetary Policy Strategies in the Asia and Pacific Region : What Way Forward?," Finance Working Papers 23011, East Asian Bureau of Economic Research.
  4. Phillip Anthony O’Hara, 2011. "International Subprime Crisis and Recession: Emerging Macroprudential, Monetary, Fiscal and Global Governance," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 58(1), pages 1-17, March.
  5. Paul Wachtel, 2011. "Central Banking for the 21st Century: An American Perspective," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 11-02, New York University, Leonard N. Stern School of Business, Department of Economics.
  6. Otaviano Canuto, 2011. "How Complementary Are Prudential Regulation and Monetary Policy?," World Bank Other Operational Studies 10089, The World Bank.

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