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Monetary Policy and Asset Prices: Does 'Benign Neglect' Make Sense?

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  • Bordo, Michael D
  • Jeanne, Olivier

Abstract

The link between monetary policy and asset price movements has been of perennial interest to policy makers. In this paper we consider the potential case for pre-emptive monetary restrictions when asset price reversals can have serious effects on real output. First, we present some stylized facts on boom-bust dynamics in stock and property prices in developed economies. We then discuss the case for a pre-emptive monetary policy in the context of a stylized framework with collateral constraints in the productive sector. We find that whether such a policy is warranted depends on the economic conditions in a complex, nonlinear way. The optimal policy cannot be summarized by a simple policy rule of the type considered in the inflation-targeting literature. Copyright 2002 by Blackwell Publishers Ltd.

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  • Bordo, Michael D & Jeanne, Olivier, 2002. "Monetary Policy and Asset Prices: Does 'Benign Neglect' Make Sense?," International Finance, Wiley Blackwell, vol. 5(2), pages 139-164, Summer.
  • Handle: RePEc:bla:intfin:v:5:y:2002:i:2:p:139-64
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    1. Michael D. Bordo & Olivier Jeanne, 2002. "Boom-Busts in Asset Prices, Economic Instability, and Monetary Policy," NBER Working Papers 8966, National Bureau of Economic Research, Inc.
    2. James B. Bullard & Eric Schaling, 2002. "Why the Fed should ignore the stock market," Review, Federal Reserve Bank of St. Louis, issue Mar., pages 35-42.
    3. Barry Eichengreen & Michael D. Bordo, 2003. "Crises now and then: what lessons from the last era of financial globalization?," Chapters,in: Monetary History, Exchange Rates and Financial Markets, chapter 3 Edward Elgar Publishing.
    4. Ben S. Bernanke & Mark Gertler, 1999. "Monetary policy and asset price volatility," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 17-51.
    5. Eugene White & Frederic Mishkin, 2002. "U.S.Stock Market Crashes and Their Aftermath: Implications for Monetary Policy," Departmental Working Papers 200208, Rutgers University, Department of Economics.
    6. Bill Dupor, 2002. "The Natural Rate of Q," American Economic Review, American Economic Association, vol. 92(2), pages 96-101, May.
    7. Gilchrist, Simon & Leahy, John V., 2002. "Monetary policy and asset prices," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 75-97, January.
    8. Oliver Hart & John Moore, 1994. "A Theory of Debt Based on the Inalienability of Human Capital," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 841-879.
    9. Batini, Nicoletta & Nelson, Edward, 2000. "When the Bubble Bursts: Monetary Policy Rules and Foreign Exchange Market Behavior," Working Papers 2000-01, University of Sydney, School of Economics.
    10. Andrew J. Filardo, 2000. "Monetary policy and asset prices," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 11-37.
    11. Abdelhak S Senhadji & Charles Collyns, 2002. "Lending Booms, Real Estate Bubbles and the Asian Crisis," IMF Working Papers 02/20, International Monetary Fund.
    12. Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements.
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