Asset Price Inflation and Monetary Policy
AbstractIt is crucial that central banks and regulatory authorities be aware of effects of asset price inflation on the stability of the financial system. Lending activity based on asset collateral during the boom is hazardous to the health of lenders when the boom collapses. One way that authorities can curb the distortion of lenders' portfolios during asset price booms is to have in place capital requirements that increase with the growth of credit extensions collateralized by assets whose prices have escalated. If financial institutions avoid this pitfall, their soundness will not be impaired when assets backing loans fall in value. Rather than trying to gauge the effects of asset prices on core inflation, central banks may be better advised to be alert to the weakening of financial balance sheets in the aftermath of a fall in value of asset collateral backing loans.
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Date of creation: Nov 2002
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- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
- E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
This paper has been announced in the following NEP Reports:
- NEP-ACC-2002-11-10 (Accounting & Auditing)
- NEP-ALL-2002-11-10 (All new papers)
- NEP-CBA-2002-11-10 (Central Banking)
- NEP-FIN-2002-11-10 (Finance)
- NEP-MON-2002-11-10 (Monetary Economics)
- NEP-PKE-2002-11-10 (Post Keynesian Economics)
- NEP-RMG-2002-11-10 (Risk Management)
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