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Monetary Policy and Asset Prices; Does "Benign Neglect" Make Sense?

  • Olivier Jeanne
  • Michael D. Bordo

The link between monetary policy and asset price movements has been of perennial interest to policymakers. In this paper, we consider the potential case for preemptive monetary restrictions when asset price reversals can have serious effects on real output. First, we present some stylized facts on boom-bust dynamics in stock and property prices in developed economies. We then discuss the case for a preemptive monetary policy in the context of a stylized model. We find that the optimal policy depends on the economic conditions in a complex, nonlinear way and cannot be summarized by a simple policy rule of the type considered in the inflation-targeting literature.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 02/225.

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Length: 27
Date of creation: 01 Dec 2002
Date of revision:
Handle: RePEc:imf:imfwpa:02/225
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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. Andrew J. Filardo, 2000. "Monetary policy and asset prices," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 11-37.
  3. A. Senhadji Semlali & Charles Collyns, 2002. "Lending Booms, Real Estate Bubbles and the Asian Crisis," IMF Working Papers 02/20, International Monetary Fund.
  4. 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.
  5. 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.
  6. 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.
  7. Gilchrist, Simon & Leahy, John V., 2002. "Monetary policy and asset prices," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 75-97, January.
  8. James B. Bullard & Eric Schaling, 2002. "Why the Fed should ignore the stock market," Review, Federal Reserve Bank of St. Louis, issue Mar., pages 35-42.
  9. 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.
  10. Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements.
  11. Bill Dupor, 2002. "The Natural Rate of Q," American Economic Review, American Economic Association, vol. 92(2), pages 96-101, May.
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