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Boom-Busts in Asset Prices, Economic Instability and Monetary Policy

  • Bordo, Michael D
  • Jeanne, Olivier

The link between monetary policy and asset price movements has been of perennial interest to policy makers. In this Paper we consider the potential case for pre-emptive monetary restrictions when asset price reversals can have serious effects on real output. First, we provide some historical background on two famous asset price reversals: the US stock market crash of 1929 and the bursting of the Japanese bubble in 1989. We then present some stylized facts on boom-bust dynamics in stock and property prices in developed economies. We then discuss the case for a pre-emptive monetary policy in the context of a stylized ‘Dynamic New Keynesian’ framework with collateral constraints in the productive sector. We find that whether such a policy is warranted depends on the economic conditions in a complex, non-linear way. The optimal policy cannot be summarized by a simple policy rule of the type considered in the inflation-targeting literature.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3398.

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Date of creation: May 2002
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Handle: RePEc:cpr:ceprdp:3398
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  1. Barry Eichengreen & Michael D. Bordo, 2002. "Crises Now and Then: What Lessons from the Last Era of Financial Globalization," NBER Working Papers 8716, National Bureau of Economic Research, Inc.
  2. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-76, June.
  3. Hart, Oliver & Moore, John, 1994. "A Theory of Debt Based on the Inalienability of Human Capital," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 841-79, November.
  4. Romer, Christina D, 1990. "The Great Crash and the Onset of the Great Depression," The Quarterly Journal of Economics, MIT Press, vol. 105(3), pages 597-624, August.
  5. Frederic S. Mishkin & Eugene N. White, 2002. "U.S. Stock Market Crashes and Their Aftermath: Implications for Monetary Policy," NBER Working Papers 8992, National Bureau of Economic Research, Inc.
  6. Takatoshi Ito & Tokuo Iwaisako, 1996. "Explaining Asset Bubbles in Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 14(1), pages 143-193, July.
  7. Garber, Peter M, 1990. "Famous First Bubbles," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 35-54, Spring.
  8. Stephen G. Cecchetti & Anil K Kashyap, 1995. "International Cycles," NBER Working Papers 5310, National Bureau of Economic Research, Inc.
  9. Ben Bernanke & Mark Gertler, 1999. "Monetary policy and asset price volatility," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 17-51.
  10. Andrew J. Filardo, 2000. "Monetary policy and asset prices," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 11-37.
  11. A. Senhadji Semlali & Charles Collyns, 2002. "Lending Booms, Real Estate Bubbles and the Asian Crisis," IMF Working Papers 02/20, International Monetary Fund.
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