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Asset Price Inflation and Monetary Policy

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Author Info
Anna J. Schwartz
Abstract

It 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9321.

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Date of creation: Nov 2002
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Handle: RePEc:nbr:nberwo:9321

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Find related papers by JEL classification:
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

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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.:
  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)
  2. James H. Stock & Mark W. Watson, 2001. "Forecasting output and inflation: the role of asset prices," Proceedings, Federal Reserve Bank of San Francisco, issue Mar. [Downloadable!]
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  3. 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)
  4. 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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  5. Mori, Naruki & Shiratsuka, Shigenori & Taguchi, Hiroo, 2001. "Policy Responses to the Post-bubble Adjustments in Japan: A Tentative Review," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(S1), pages 53-102, February. [Downloadable!]
  6. Goodhart, Charles, 2001. "What Weight Should Be Given to Asset Prices in the Measurement of Inflation?," Economic Journal, Royal Economic Society, vol. 111(472), pages F335-56, June. [Downloadable!] (restricted)
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(explanations, 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.)

  1. Stephen G Cecchetti, 2003. "What the FOMC Says and Does When the Stock Market Booms," RBA Annual Conference Volume, in: Anthony Richards & Tim Robinson (ed.), Asset Prices and Monetary Policy Reserve Bank of Australia. [Downloadable!]
  2. Stephen Bell & John Quiggin, 2004. "Asset Price Instability and Policy Responses: The Legacy of Liberalisation," Australian Public Policy Program Working Papers WPP04_3, Risk and Sustainable Management Group, University of Queensland. [Downloadable!]
  3. Erlend Nier, 2009. "Financial Stability Frameworks and the Role of Central Banks: Lessons from the Crisis," IMF Working Papers 09/70, International Monetary Fund. [Downloadable!]
  4. Maria Socorro Gochoco-Bautista, 2008. "Asset prices and monetary policy: booms and fat tails in East Asia," BIS Working Papers 243, Bank for International Settlements. [Downloadable!]
  5. Michael D. Bordo & David C. Wheelock, 2004. "Monetary Policy and Asset Prices: A Look Back at Past U.S. Stock Market Booms," NBER Working Papers 10704, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Luci Ellis & Jeremy Lawson & Laura Roberts-Thomson, 2003. "Housing Leverage in Australia," RBA Research Discussion Papers rdp2003-09, Reserve Bank of Australia. [Downloadable!]
  7. David S. Bieri, 2004. "The Basel Process and Financial Stability," Macroeconomics 0412001, EconWPA. [Downloadable!]
  8. Gordon de Brouwer, 2003. "Discussion of 'It Takes More Than a Bubble to Become Japan'," RBA Annual Conference Volume, in: Anthony Richards & Tim Robinson (ed.), Asset Prices and Monetary Policy Reserve Bank of Australia. [Downloadable!]
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