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Asset Price Regulators, Unite: you have Macroeconomic Stability to Win and the Microeconomic Losses are Second-order

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Abstract

The Global Financial Crisis (GFC) has rekindled debate about the desirability of governmental interference in asset markets - either through the operation of policy levers, or, through the chosen institutional setup. In this paper we quantify economic costs due to mispricing of real assets in the USAGE model of the United States. The microeconomic costs of misallocated capital are second order small. The model suggests that regulators (or central banks) who risk mispricing by influencing asset prices do so without incurring large economic costs.

Suggested Citation

  • G. Menzies & R. Bird & P. Dixon & M. Rimmer, 2010. "Asset Price Regulators, Unite: you have Macroeconomic Stability to Win and the Microeconomic Losses are Second-order," Centre of Policy Studies/IMPACT Centre Working Papers g-205, Victoria University, Centre of Policy Studies/IMPACT Centre.
  • Handle: RePEc:cop:wpaper:g-205
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    References listed on IDEAS

    as
    1. Gadi Barlevy, 2007. "Economic theory and asset bubbles," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 44-59.
    2. Eugene White & Frederic Mishkin, 2002. "U.S.Stock Market Crashes and Their Aftermath: Implications for Monetary Policy," Departmental Working Papers 200208, Rutgers University, Department of Economics.
    3. Meredith Beechey & Nargis Bharucha & Adam Cagliarini & David Gruen & Christopher Thompson, 2000. "A Small Model of the Australian Macroeconomy," RBA Research Discussion Papers rdp2000-05, Reserve Bank of Australia.
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    More about this item

    Keywords

    Capital Misallocation; Financial crises; CGE modeling; real assets;

    JEL classification:

    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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