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Asset Prices and Monetary Policy: A Canadian Perspective on the Issues

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The issue addressed in this article is the extent to which monetary policy in Canada should respond to asset-price bubbles. The article concludes that maintaining low and stable consumer price inflation is the best contribution that monetary policy can make to promoting economic and financial stability, even when the economy experiences asset-price bubbles. In extreme circumstances--when an asset-price bubble is well identified and likely to have significant costs to the economy when it bursts--monetary policy might better maintain low and stable consumer price inflation by leaning against a particular bubble even though it may mean that inflation deviates temporarily from its target. Such a strategy might reduce the risk that a crash in asset prices could lead to a recession and to inflation markedly below target in the longer run. The circumstances where this strategy is possible will be rare because economists are far from being able to determine consistently and reliably when leaning against a particular bubble is likely to do more harm than good. Housing-price bubbles should be a greater concern for Canadian monetary policy than equity-price bubbles, since rising housing prices are more likely to reflect excessively easy domestic credit conditions than are equity prices, which are largely determined in global markets.

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  • Jack Selody & Carolyn Wilkins, 2004. "Asset Prices and Monetary Policy: A Canadian Perspective on the Issues," Bank of Canada Review, Bank of Canada, vol. 2004(Autumn), pages 3-14.
  • Handle: RePEc:bca:bcarev:v:2004:y:2004:i:autumn04:p:3-14
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    1. Andrew K. Rose & Eric van Wincoop, 2001. "National Money as a Barrier to International Trade: The Real Case for Currency Union," American Economic Review, American Economic Association, vol. 91(2), pages 386-390, May.
    2. Thom, Rodney & Walsh, Brendan, 2002. "The effect of a currency union on trade: Lessons from the Irish experience," European Economic Review, Elsevier, vol. 46(6), pages 1111-1123, June.
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    Cited by:

    1. Alan G. Ahearne & John Ammer & Brian M. Doyle & Linda S. Kole & Robert F. Martin, 2005. "Monetary Policy and House Prices: A Cross-Country Study," Working Papers Central Bank of Chile 344, Central Bank of Chile.
    2. Martha López, 2006. "House Prices and Monetary Policy in Colombia," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, vol. 24(50), pages 212-241, June.
    3. Frederic S. Mishkin, 2007. "Housing and the monetary transmission mechanism," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 359-413.
    4. Jason Allen & Robert Amano & David P. Byrne & Allan W. Gregory, 2009. "Canadian city housing prices and urban market segmentation," Canadian Journal of Economics, Canadian Economics Association, vol. 42(3), pages 1132-1149, August.
    5. Marc Lavoie & Mario Seccareccia, 2012. "Monetary Policy in a Period of Financial Chaos: The Political Economy of the Bank of Canada in Extraordinary Times," Chapters,in: Monetary Policy and Central Banking, chapter 9 Edward Elgar Publishing.
    6. repec:bdr:ensayo:v::y:2006:i:50:p:212-241 is not listed on IDEAS
    7. Greg Tkacz & Carolyn Wilkins, 2006. "Linear and Threshold Forecasts of Output and Inflation with Stock and Housing Prices," Staff Working Papers 06-25, Bank of Canada.
    8. Booth, Philip, 2014. "Monetary policy, asset prices and financial institutions," Annals of Actuarial Science, Cambridge University Press, vol. 8(01), pages 9-41, March.
    9. Papa M N'Diaye, 2009. "Countercyclical Macro Prudential Policies in a Supporting Role to Monetary Policy," IMF Working Papers 09/257, International Monetary Fund.
    10. Nunes, Mauricio & Da Silva, Sergio, 2007. "Rational bubbles in emerging stockmarkets," MPRA Paper 4641, University Library of Munich, Germany.

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