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Optimal interest rate policy during asset price booms: The mirage of 'benign neglect'


  • Berger, Wolfram
  • Ki[beta]mer, Friedrich


We show that a policy of 'benign neglect' towards an asset price boom is not a sensible option when expectations are forward-looking. Policymakers choose between a policy that cuts real interest rates and one that raises them during asset price booms.

Suggested Citation

  • Berger, Wolfram & Ki[beta]mer, Friedrich, 2008. "Optimal interest rate policy during asset price booms: The mirage of 'benign neglect'," Economics Letters, Elsevier, vol. 101(3), pages 265-267, December.
  • Handle: RePEc:eee:ecolet:v:101:y:2008:i:3:p:265-267

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    References listed on IDEAS

    1. Charles Bean, 2003. "Asset Prices, Financial Imbalances and Monetary Policy: Are Inflation Targets Enough?," RBA Annual Conference Volume,in: Anthony Richards & Tim Robinson (ed.), Asset Prices and Monetary Policy Reserve Bank of Australia.
    2. Nouriel Roubini, 2006. "Why Central Banks Should Burst Bubbles," International Finance, Wiley Blackwell, vol. 9(1), pages 87-107, May.
    3. Adam S. Posen, 2006. "Why Central Banks Should Not Burst Bubbles," International Finance, Wiley Blackwell, vol. 9(1), pages 109-124, May.
    4. DETKEN Carsten & SMETS Frank, "undated". "Asset Price Booms and Monetary Policy," EcoMod2003 330700042, EcoMod.
    5. 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.
    6. Ben S. Bernanke & Mark Gertler, 1999. "Monetary policy and asset price volatility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 77-128.
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    Cited by:

    1. Julián A.Parra Polanía & Carmiña O.Vargas Riaño, 2012. "Valor óptimo del impuesto sobre flujos de capital para Colombia," Borradores de Economia 715, Banco de la Republica de Colombia.
    2. Wolfram Berger & Friedrich Kissmer, 2013. "Monetary Policy and Asset Prices: When Cleaning Up Hits the Zero Lower Bound," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 149(III), pages 291-312, September.


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