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Monetary policy and financial imbalances: facts and fiction

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  • Katrin Assenmacher-Wesche
  • Stefan Gerlach

Abstract

"Following the financial crisis, many have argued that monetary policy should lean against asset price increases and that deviations of credit and asset prices from trend can be used to capture financial imbalances. We study quarterly data spanning 1986-2008 for a sample of 18 countries and argue that such measures contain little information useful for forecasting the future economic conditions. This casts doubts on the leaning-against-the-wind view. We also argue that tightening monetary policy in response to such imbalances are likely to depress real growth substantially. That finding, however, is sensitive to the Lucas critique." Copyright (c) CEPR, CES, MSH, 2010.

Suggested Citation

  • Katrin Assenmacher-Wesche & Stefan Gerlach, 2010. "Monetary policy and financial imbalances: facts and fiction," Economic Policy, CEPR;CES;MSH, vol. 25, pages 437-482, July.
  • Handle: RePEc:bla:ecpoli:v:25:y:2010:i::p:437-482
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    References listed on IDEAS

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    7. Charles Goodhart & Boris Hofmann, 2008. "House prices, money, credit, and the macroeconomy," Oxford Review of Economic Policy, Oxford University Press, vol. 24(1), pages 180-205, spring.
    8. Boris Hofmann, 2003. "Bank Lending and Property Prices: Some International Evidence," Working Papers 222003, Hong Kong Institute for Monetary Research.
    9. Marek Jarocinski & Frank Smets, 2008. "House prices and the stance of monetary policy," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 339-366.
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