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Monetary Policy and Asset Prices : What Role for Central Banks in New EU Member States?

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  • Frait, Jan

    (Czech National Bank, Prague)

  • Komarek, Lubos

    (Czech National Bank, Prague and Prague School of Economics)

Abstract

The paper deals with the relationship between monetary policy and asset prices. Besides surveying the general discussion, it attempts to extend it to recent developments in the new Member States of the EU (NMS), namely the Czech Republic, Hungary, Poland and Slovakia (the EU4). After a brief description of the current macroeconomic situation in the NMS, the appropriate reaction of monetary policy to asset price bubbles is dealt with and the main pros and cons associated with this reaction are summarised. Afterwards, the risks of asset market bubbles in the EU4 countries are evaluated. Since the capital markets are still underdeveloped and the real estate price boom seems to be a natural reaction to the initial undervaluation, the risks are viewed as rather small. The conclusion is thus that it is crucial for central banks in mature economies as well as in the NMS to conduct their monetary policies as well as their supervisory and regulatory roles in a way that does not promote the build-up of asset market bubbles. In exceptional times, central banks of small open economies must be ready to use monetary policy steps as a kind of insurance against the adverse effects of potential asset market bubbles.

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File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2008/twerp_738.pdf
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Bibliographic Info

Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 738.

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Length: 21 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:wrk:warwec:738

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Keywords: Monetary Policy ; Asset Markets ; Central Banking ; New EU Member States;

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References

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  1. 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.
  2. Adam S. Posen, 2006. "Why Central Banks Should Not Burst Bubbles," Working Paper Series, Peterson Institute for International Economics WP06-1, Peterson Institute for International Economics.
  3. Alan S. Blinder & Ricardo Reis, 2005. "Understanding the Greenspan Standard," Working Papers, Princeton University, Department of Economics, Center for Economic Policy Studies. 88, Princeton University, Department of Economics, Center for Economic Policy Studies..
  4. Ceyla Pazarbasioglu & Gudrun Johnsen & Paul Louis Ceriel Hilbers & Inci Ötker, 2005. "Assessing and Managing Rapid Credit Growth and the Role of Supervisory and Prudential Policies," IMF Working Papers 05/151, International Monetary Fund.
  5. Jan Hanousek & Zdenek Tuma, 2002. "A test of the permanent income hypothesis on Czech voucher privatization," The Economics of Transition, The European Bank for Reconstruction and Development, The European Bank for Reconstruction and Development, vol. 10(2), pages 235-254, July.
  6. Gilchrist, Simon & Leahy, John V., 2002. "Monetary policy and asset prices," Journal of Monetary Economics, Elsevier, Elsevier, vol. 49(1), pages 75-97, January.
  7. Ben Bernanke & Mark Gertler, 1999. "Monetary policy and asset price volatility," Economic Review, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, issue Q IV, pages 17-51.
  8. Lawrence J. Christiano & Terry J. Fitzgerald, 1999. "The Band Pass Filter," NBER Working Papers 7257, National Bureau of Economic Research, Inc.
  9. Ben S. Bernanke & Mark Gertler, 2001. "Should Central Banks Respond to Movements in Asset Prices?," American Economic Review, American Economic Association, American Economic Association, vol. 91(2), pages 253-257, May.
  10. Nouriel Roubini, 2006. "Why Central Banks Should Burst Bubbles," International Finance, Wiley Blackwell, Wiley Blackwell, vol. 9(1), pages 87-107, 05.
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Cited by:
  1. Lubos Komarek & Ivana Kubicová, 2011. "The Classification and Identification of Asset Price Bubbles," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, Charles University Prague, Faculty of Social Sciences, vol. 61(1), pages 34-48, January.
  2. Michal Hlavacek & Lubos Komarek, 2009. "Housing Price Bubbles and their Determinants in the Czech Republic and its Regions," Working Papers, Czech National Bank, Research Department 2009/12, Czech National Bank, Research Department.
  3. Luboš Komárek & Ivana Kubicová, 2011. "Methods of Identification Asset Price Bubbles In the Czech Economy," Politická ekonomie, University of Economics, Prague, University of Economics, Prague, vol. 2011(2), pages 164-183.
  4. Michal Hlaváček & Luboš Komárek, 2010. "Equilibrium Development of Housing Prices in the Czech Republic," Politická ekonomie, University of Economics, Prague, University of Economics, Prague, vol. 2010(3), pages 326-342.
  5. Jan Babecky & Sofia Bauducco & Ales Bulir & Martin Cihak & Petr Jakubik & Lubos Komarek & Zlata Komarkova & Jiri Podpiera & Christian Schmieder & Laurent Weill, 2009. "CNB Economic Research Bulletin: Financial and Global Stability Issues," Occasional Publications - Edited Volumes, Czech National Bank, Research Department, Czech National Bank, Research Department, edition 2, volume 7, number rb07/2 edited by Jan Babecky & Jan Frait, August.
  6. Jan Frait & Luboš Komárek & Zlatuše Komárková, 2011. "Monetary Policy in a Small Economy after Tsunami: A New Consensus on the Horizon?," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, Charles University Prague, Faculty of Social Sciences, vol. 61(1), pages 5-33, January.
  7. Michal Hlavacek & Lubos Komarek, 2009. "Property Price Determinants in the Czech Regions," Occasional Publications - Chapters in Edited Volumes, Czech National Bank, Research Department, in: CNB Financial Stability Report 2008/2009, chapter 0, pages 82-91 Czech National Bank, Research Department.
  8. Jan Hošek & Luboš Komárek & Martin Motl, 2011. "Monetary Policy and Price of Oil," Politická ekonomie, University of Economics, Prague, University of Economics, Prague, vol. 2011(1), pages 22-46.

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