Monetary Policy and Asset Prices : What Role for Central Banks in New EU Member States?
AbstractThe 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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Bibliographic InfoPaper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 738.
Length: 21 pages
Date of creation: 2006
Date of revision:
Monetary Policy ; Asset Markets ; Central Banking ; New EU Member States;
Other versions of this item:
- Jan Frait & Luboš Komárek, 2007. "Monetary Policy and Asset Prices: What Role for Central Banks in New EU Member States?," Prague Economic Papers, University of Economics, Prague, vol. 2007(1), pages 3-23.
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-06-03 (All new papers)
- NEP-CBA-2006-06-03 (Central Banking)
- NEP-EEC-2006-06-03 (European Economics)
- NEP-FIN-2006-06-03 (Finance)
- NEP-FMK-2006-06-03 (Financial Markets)
- NEP-MAC-2006-06-03 (Macroeconomics)
- NEP-MON-2006-06-03 (Monetary Economics)
- NEP-TRA-2006-06-03 (Transition Economics)
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