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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. David Gruen & Michael Plumb & Andrew Stone, 2003. "How Should Monetary Policy Respond to Asset-price Bubbles?," RBA Research Discussion Papers rdp2003-11, Reserve Bank of Australia.
  2. Charles Bean, 2003. "Asset prices, financial imbalances and monetary policy: are inflation targets enough?," BIS Working Papers 140, Bank for International Settlements.
  3. Lars E. O. Svensson, 2003. "What is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," NBER Working Papers 9421, National Bureau of Economic Research, Inc.
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  11. 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.
  12. Borio, Claudio, 2006. "Monetary and financial stability: Here to stay?," Journal of Banking & Finance, Elsevier, vol. 30(12), pages 3407-3414, December.
  13. Svensson, Lars E O, 2004. "Optimal Policy with Low-Probability Extreme Events," CEPR Discussion Papers 4218, C.E.P.R. Discussion Papers.
  14. Ben S. Bernanke & Mark Gertler, 2001. "Should Central Banks Respond to Movements in Asset Prices?," American Economic Review, American Economic Association, vol. 91(2), pages 253-257, May.
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  17. Laurence Ball, 1997. "Efficient rules for monetary policy," Reserve Bank of New Zealand Discussion Paper Series G97/3, Reserve Bank of New Zealand.
  18. Lars E. O. Svensson & Michael Woodford, 2003. "Implementing Optimal Policy through Inflation-Forecast Targeting," NBER Working Papers 9747, National Bureau of Economic Research, Inc.
  19. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
  20. Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements.
  21. 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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