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Inflation targeting, asset prices, and financial imbalances: Contextualizing the debate

  • Disyatat, Piti

This paper casts the debate regarding the role of asset prices and financial imbalances in the formulation of monetary policy from the perspective of theoretically optimal policy responses. Within the context of a standard model of the transmission mechanism, several possible motivations for responding to financial imbalances are highlighted. However, preventative policy actions against the build-up of financial imbalances cannot be easily understood within such a framework without fundamental modification to the underlying model. It is argued that a more practical way to evaluate such actions is through the inclusion of concerns for financial imbalances explicitly in the central bank's objective function.

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Article provided by Elsevier in its journal Journal of Financial Stability.

Volume (Year): 6 (2010)
Issue (Month): 3 (September)
Pages: 145-155

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Handle: RePEc:eee:finsta:v:6:y:2010:i:3:p:145-155
Contact details of provider: Web page: http://www.elsevier.com/locate/jfstabil

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  1. Svensson, Lars E.O. & Rudebusch , Glenn, 1998. "Policy Rules for Inflation Targeting," Seminar Papers 637, Stockholm University, Institute for International Economic Studies.
  2. Laurence Ball, 1997. "Efficient Rules for Monetary Policy," NBER Working Papers 5952, National Bureau of Economic Research, Inc.
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  10. Bordo, Michael D & Jeanne, Olivier, 2002. "Monetary Policy and Asset Prices: Does 'Benign Neglect' Make Sense?," International Finance, Wiley Blackwell, vol. 5(2), pages 139-64, Summer.
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  17. Stephen G. Cecchetti & Hans Genberg & Sushil Wadhwani, 2002. "Asset Prices in a Flexible Inflation Targeting Framework," NBER Working Papers 8970, National Bureau of Economic Research, Inc.
  18. Borio, Claudio, 2006. "Monetary and financial stability: Here to stay?," Journal of Banking & Finance, Elsevier, vol. 30(12), pages 3407-3414, December.
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  20. Andrew J. Filardo, 2001. "Should monetary policy respond to asset price bubbles? : some experimental results," Research Working Paper RWP 01-04, Federal Reserve Bank of Kansas City.
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