Asset price bubbles and counter-cyclical monetary policy: Why central banks have been wrong and what should be done
Central banks have generally opposed targeting asset and credit market excess. This paper argues against that position. Bubbles can impose significant harm through the debt footprint effects they leave behind, and through distortions resulting from using interest rates to mitigate their aggregate demand impacts. Conventional interest rate policy is not well suited to managing bubbles, and the paper argues for adoption of a new system of asset based reserve requirements (ABRR). Not only can ABRR target asset market excess, they also strengthen counter-cyclical monetary policy.
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- Friedman, Benjamin M, 1999. "The Future of Monetary Policy: The Central Bank as an Army with Only a Signal Corps?," International Finance, Wiley Blackwell, vol. 2(3), pages 321-338, November.
- Thomas Palley, 2003. "Asset Price Bubbles and the Case for Asset-Based Reserve Requirements," Challenge, M.E. Sharpe, Inc., vol. 46(3), pages 53-72, May.
- Benjamin M. Friedman, 1999. "The Future of Monetary Policy: The Central Bank as an Army With Only a Signal Corps," NBER Working Papers 7420, National Bureau of Economic Research, Inc.
- Thomas Palley, 2004. "Asset-based reserve requirements: reasserting domestic monetary control in an era of financial innovation and instability," Review of Political Economy, Taylor & Francis Journals, vol. 16(1), pages 43-58.
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