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Monetary policy and asset price bubbles: calibrating the monetary policy trade-offs

  • Andrew Filardo

The issue of monetary policy and asset prices has been receiving much attention not only because it is an interesting topic for macroeconomists but also because central banks have faced daunting challenges from large swings in various types of asset prices. To some extent, the achievement of a low, stable inflation environment has not simultaneously brought about a more stable asset price environment. The record over the past decade, in fact, has raised the prospect of asset price booms and busts as a permanent feature of the monetary policy landscape. This paper lays out a general framework to explore some of the key monetary policy trade-offs presented by asset prices, with particular emphasis on the role of asset price bubbles.

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Paper provided by Bank for International Settlements in its series BIS Working Papers with number 155.

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Length: 37 pages
Date of creation: Jun 2004
Date of revision:
Handle: RePEc:bis:biswps:155
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  1. David Gruen & Michael Plumb & Andrew Stone, 2003. "How Should Monetary Policy Respond to Asset-price Bubbles?," RBA Annual Conference Volume, in: Anthony Richards & Tim Robinson (ed.), Asset Prices and Monetary Policy Reserve Bank of Australia.
  2. De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990. "Noise Trader Risk in Financial Markets," Scholarly Articles 3725552, Harvard University Department of Economics.
  3. James H. Stock & Mark W.Watson, 2003. "Forecasting Output and Inflation: The Role of Asset Prices," Journal of Economic Literature, American Economic Association, vol. 41(3), pages 788-829, September.
  4. Shigenori Shiratsuka, 1999. "Asset price fluctuation and price indices," Working Paper Series WP-99-9, Federal Reserve Bank of Chicago.
  5. Michael D. Bordo & Olivier Jeanne, 2002. "Boom-Busts in Asset Prices, Economic Instability, and Monetary Policy," NBER Working Papers 8966, National Bureau of Economic Research, Inc.
  6. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, October.
  7. Ikeda, Shinsuke & Shibata, Akihisa, 1992. "Fundamentals-dependent bubbles in stock prices," Journal of Monetary Economics, Elsevier, vol. 30(1), pages 143-168, October.
  8. Mori, Naruki & Shiratsuka, Shigenori & Taguchi, Hiroo, 2001. "Policy Responses to the Post-bubble Adjustments in Japan: A Tentative Review," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(S1), pages 53-102, February.
  9. Victor Zarnowitz, 1992. "Business Cycles: Theory, History, Indicators, and Forecasting," NBER Books, National Bureau of Economic Research, Inc, number zarn92-1, October.
  10. Anna J. Schwartz, 2002. "Asset Price Inflation and Monetary Policy," NBER Working Papers 9321, National Bureau of Economic Research, Inc.
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