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Asset Price Instability and Policy Responses: The Legacy of Liberalisation

  • Bell, Stephen
  • Quiggin, John

The debate about the dynamics and potential policy responses to asset inflation has intensified in recent years. Some analysts, notably Borio and Lowe, have called for 'subtle' changes to existing monetary targeting frameworks to try to deal with the problems of asset inflation and have attempted to developed indicators of financial vulnerability to aid this process. In contrast, this paper argues that the uncertainties involved in understanding financial market developments and their potential impact on the real economy are likely to remain too high to embolden policy makers. The political and institutional risks associated with policy errors are also significant. The fundamental premise that a liberalised financial system is based on 'efficient' market allocation cannot be overlooked. The corollary is that any serious attempt to stabilize financial market outcomes must involve at least a partial reversal of deregulation

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Paper provided by University of Queensland, School of Economics in its series Risk and Sustainable Management Group Working Papers with number 151505.

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Date of creation: 02 Dec 2003
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Handle: RePEc:ags:uqsers:151505
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  1. C. Goodhart, 2001. "What Weight Should be Given to Asset Prices in the Measurementof Inflation?," DNB Staff Reports (discontinued) 65, Netherlands Central Bank.
  2. Anna J. Schwartz, 2002. "Asset Price Inflation and Monetary Policy," NBER Working Papers 9321, National Bureau of Economic Research, Inc.
  3. Barry Eichengreen and Carlos Arteta., 2000. "Banking Crises in Emerging Markets: Presumptions and Evidence," Center for International and Development Economics Research (CIDER) Working Papers C00-115, University of California at Berkeley.
  4. Goodhart, Charles, 2001. "What Weight Should Be Given to Asset Prices in the Measurement of Inflation?," Economic Journal, Royal Economic Society, vol. 111(472), pages F335-56, June.
  5. Burton G. Malkiel, 2003. "The Efficient Market Hypothesis and Its Critics," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 59-82, Winter.
  6. repec:fth:sydnec:99-19 is not listed on IDEAS
  7. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-48, December.
  8. Alchian, Armen A & Klein, Benjamin, 1973. "On a Correct Measure of Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 5(1), pages 173-91, Part I Fe.
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