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Asset Prices, Inflation and Monetary Control - Re-inventing Money as a Policy Tool

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Abstract

Low inflation on goods markets provides no reliable precondition for asset-market stability; it might even promote the emergence of bubbles because interest rates and risk premia appear to be low. A further factor driving asset demand is easy availability of credit, which in turn roots in the banking system operating in a regime of endogenous central-bank money. A comparison of Bundesbank and ECB policies suggests that credit growth can be controlled more efficiently if rising interest rates are accompanied by some liquidity squeeze that supports the spillover of a monetary restriction to capital markets. The announcement effect of a central bank Charter including the goal of financial-market stability helps to deter private agents from excessive asset trading.

Suggested Citation

  • Peter Spahn, 2010. "Asset Prices, Inflation and Monetary Control - Re-inventing Money as a Policy Tool," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 323/2010, Department of Economics, University of Hohenheim, Germany.
    • Handle: RePEc:hoh:hohdip:323
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    More about this item

    Keywords

    open-market policy; asset-price bubble; euro money market; ECB strategy;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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