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Should Monetary Policy respond to Asset Price Bubbles? Revisiting the Debate

  • Sushil Wadhwani

We argue that central banks can improve macroeconomic performance by reacting to asset price misalignments over and above their reaction to fixed horizon inflation forecasts. This is because such countercyclical monetary policy tends to offset the impact on output and inflation of such bubbles. In addition, if it were know ex ante that monetary policy would LATW in this way, it might reduce the probability of bubbles arising at all.

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This chapter was published in:
  • John P. Calverley & Fernando Restoy & Jesper Ulriksen Thuesen & Andrea Vivoli & Sushil Wadhwani & Axel A. Weber, 2008. "Monetary Policy, Regulation and Volatile Markets," SUERF Studies, SUERF - The European Money and Finance Forum, number 2008/4 edited by Morten Balling & Ernest Gnan & Catherine Lubochinsky, February.
  • This item is provided by SUERF - The European Money and Finance Forum in its series Chapters in SUERF Studies with number 51-3.
    Handle: RePEc:erf:erfssc:51-3
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    1. Orazio Mastroeni, 2001. "Pfandbrief-style products in Europe," BIS Papers chapters, in: Bank for International Settlements (ed.), The changing shape of fixed income markets: a collection of studies by central bank economists, volume 5, pages 44-66 Bank for International Settlements.
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