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Asset Price Instability and Policy Responses: The Legacy of Liberalisation

Author

Listed:
  • Stephen Bell

    (University of Queensland)

  • John Quiggin

    (Department of Economics, University of Queensland)

Abstract

The debate about the dynamics and potential policy responses to asset inflation has intensified in recent years. Some analysts, notably Borio and Lowe, have called for 'subtle' changes to existing monetary targeting frameworks to try to deal with the problems of asset inflation and have attempted to developed indicators of financial vulnerability to aid this process. In contrast, this paper argues that the uncertainties involved in understanding financial market developments and their potential impact on the real economy are likely to remain too high to embolden policy makers. The political and institutional risks associated with policy errors are also significant. The fundamental premise that a liberalised financial system is based on 'efficient' market allocation cannot be overlooked. The corollary is that any serious attempt to stabilize financial market outcomes must involve at least a partial reversal of deregulation.

Suggested Citation

  • 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.
    • Handle: RePEc:rsm:pubpol:p04_3
    as

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    File URL: http://www.uq.edu.au/rsmg/WP/WPP04_3.pdf
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    References listed on IDEAS

    as
    1. Burton G. Malkiel, 2003. "The Efficient Market Hypothesis and Its Critics," Working Papers 111, Princeton University, Department of Economics, Center for Economic Policy Studies..
    2. Alchian, Armen A & Klein, Benjamin, 1973. "On a Correct Measure of Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 5(1), pages 173-191, Part I Fe.
    3. Anna Schwartz, 2003. "Asset price inflation and monetary policy," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 31(1), pages 1-14, March.
    4. Eichengreen, Barry & Arteta, Carlos, 2000. "Banking Crises in Emerging Markets: Presumptions and Evidence," Center for International and Development Economics Research, Working Paper Series qt3pk9t1h2, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
    5. repec:pri:cepsud:91malkiel is not listed on IDEAS
    6. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-1348, December.
    7. Robert J. Shiller, 2003. "From Efficient Markets Theory to Behavioral Finance," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 83-104, Winter.
    8. 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 335-356, June.
    9. Burton G. Malkiel, 2003. "The Efficient Market Hypothesis and Its Critics," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 59-82, Winter.
    10. repec:syd:wpaper:99-19 is not listed on IDEAS
    11. Burton G. Malkiel, 2003. "The Efficient Market Hypothesis and Its Critics," Working Papers 111, Princeton University, Department of Economics, Center for Economic Policy Studies..
    12. Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements.
    Full references (including those not matched with items on IDEAS)

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Trifecta
      by John Quiggin in Crooked Timber on 2013-01-17 01:11:39
    2. Trifecta
      by John Quiggin in John Quiggin on 2013-01-17 01:13:15

    Citations

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    Cited by:

    1. Pol, Eduardo, 2009. "Regulating Financial Innovations Without Apology," Economics Working Papers wp09-01, School of Economics, University of Wollongong, NSW, Australia.
    2. John Quiggin, 2013. "The State of Economics in 2012: Complacency Amid Crisis," The Economic Record, The Economic Society of Australia, vol. 89, pages 23-30, June.

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    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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