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Central banks and asset prices: the role of the interest rate in volatility correction in the Romanian case

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  • Albulescu, Claudiu Tiberiu

Abstract

The speculative bubbles of asset prices, and especially their burst out, have a negative impact on the financial stability and also on the prices stability – the main objectives of central banks. As a consequence, a more attentive observation of the evolution of these prices is necessary. In the economic literature, opinions differ, oscillating between a total ignorance of the evolution of asset prices by the central banks and the extreme solution, consisting in considering them as the final purpose of the monetary policy. If the opportunity of the intervention is intensely analyzed, the debates related to the instruments of the intervention, differentiated depending on the nature of the assets, are almost inexistent. In this study, we intend to analyze these aspects and also to highlight the importance of dealing with the volatility of asset prices in the context of the development of the financial and real estate markets in Romania. We show that the interest rate instrument has a reduced importance in asset prices volatility correction.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 16582.

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Date of creation: 25 Feb 2008
Date of revision: 20 Jul 2009
Handle: RePEc:pra:mprapa:16582

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Keywords: asset prices; central banks; interest rate;

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  1. Garry J. Schinasi, 2003. "Responsibility of Central Banks for Stability in Financial Markets," IMF Working Papers 03/121, International Monetary Fund.
  2. Goodhart, Charles & Boris Hofmann, 2002. "Asset Prices and the Conduct of Monetary Policy," Royal Economic Society Annual Conference 2002 88, Royal Economic Society.
  3. Stephen G. Cecchetti, 2008. "Measuring the Macroeconomic Risks Posed by Asset Price Booms," NBER Chapters, in: Asset Prices and Monetary Policy, pages 9-43 National Bureau of Economic Research, Inc.
  4. Detken, Carsten & Smets, Frank, 2004. "Asset price booms and monetary policy," Working Paper Series 0364, European Central Bank.
  5. 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.
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