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Inflation Targeting, Asset Prices, and Financial Imbalances: Conceptualizing the Debate

  • Piti Disyatat

    (Bank of Thailand)

This paper attempts to conceptualize the debate regarding the role of asset prices and perceived financial imbalances in the formation of monetary policy from the perspective of theoretically optimal policy responses. While much of the disagreement can be reconciled within the framework of flexible inflation targeting, defined as a commitment to a targeting rule, preemptive policy actions against the build-up of financial imbalances cannot be motivated within such a framework without modification either to the targeting rule or the underlying model. Given standard forecasting models, such actions are shown to be operationally equivalent to targeting financial imbalances explicitly in the central bank loss function.

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Paper provided by Economic Research Department, Bank of Thailand in its series Working Papers with number 2005-09.

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Length: 36 pages
Date of creation: Jan 2005
Date of revision:
Handle: RePEc:bth:wpaper:2005-09
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  1. Nicoletta Batini & Edward Nelson, 2000. "Optimal horizons for inflation targeting," Bank of England working papers 119, Bank of England.
  2. Claudio Borio & William English & Andrew Filardo, 2003. "A tale of two perspectives: old or new challenges for monetary policy?," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 1-59 Bank for International Settlements.
  3. Lars E.O Svensson, 2002. "Monetary policy and real stabilization," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 261-312.
  4. Svensson, Lars E O, 2004. "Optimal Policy with Low-Probability Extreme Events," CEPR Discussion Papers 4218, C.E.P.R. Discussion Papers.
  5. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  6. Gruen, David & Plumb, Michael & Stone, Andrew, 2005. "How Should Monetary Policy Respond to Asset-Price Bubbles?," MPRA Paper 833, University Library of Munich, Germany.
  7. Svensson, Lars E.O., 1997. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," Seminar Papers 615, Stockholm University, Institute for International Economic Studies.
  8. Olivier Jeanne & Michael D. Bordo, 2002. "Monetary Policy and Asset Prices; Does "Benign Neglect" Make Sense?," IMF Working Papers 02/225, International Monetary Fund.
  9. William R. White & Claudio E. V. Borio, 2004. "Whither monetary and financial stability? the implications of evolving policy regimes," BIS Working Papers 147, Bank for International Settlements.
  10. Lars E.O. Svensson & Michael Woodford, 2004. "Implementing Optimal Policy through Inflation-Forecast Targeting," NBER Chapters, in: The Inflation-Targeting Debate, pages 19-92 National Bureau of Economic Research, Inc.
  11. Borio, Claudio, 2006. "Monetary and financial stability: Here to stay?," Journal of Banking & Finance, Elsevier, vol. 30(12), pages 3407-3414, December.
  12. 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.
  13. 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.
  14. Detken, Carsten & Smets, Frank, 2004. "Asset price booms and monetary policy," Working Paper Series 0364, European Central Bank.
  15. Stephen G. Cecchetti & Hans Genberg & Sushil Wadhwani, 2002. "Asset Prices in a Flexible Inflation Targeting Framework," NBER Working Papers 8970, National Bureau of Economic Research, Inc.
  16. Laurence Ball, 1997. "Efficient rules for monetary policy," Reserve Bank of New Zealand Discussion Paper Series G97/3, Reserve Bank of New Zealand.
  17. Michael Woodford, 2004. "Inflation targeting and optimal monetary policy," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 15-42.
  18. Claudio E. V. Borio & Philip Lowe, 2004. "Securing sustainable price stability: should credit come back from the wilderness?," BIS Working Papers 157, Bank for International Settlements.
  19. Charles Bean, 2003. "Asset Prices, Financial Imbalances and Monetary Policy: Are Inflation Targets Enough?," RBA Annual Conference Volume, in: Anthony Richards & Tim Robinson (ed.), Asset Prices and Monetary Policy Reserve Bank of Australia.
  20. 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.
  21. Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements.
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