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Macroeconomic Patterns and Monetary Policy in the Run-up to Asset Price Busts

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Listed:
  • Alasdair Scott
  • Pau Rabanal
  • Prakash Kannan

Abstract

We find that inflation, output and the stance of monetary policy do not typically display unusual behavior ahead of asset price busts. By contrast, credit, shares of investment in GDP, current account deficits, and asset prices typically rise, providing useful, if not perfect, leading indicators of asset price busts. These patterns could also be observed in the build-up to the current crisis. Monetary policy was not the main, systematic cause of the current crisis. But, with inflation typically under control, central banks effectively accommodated these growing imbalances, raising the risk of damaging busts.

Suggested Citation

  • Alasdair Scott & Pau Rabanal & Prakash Kannan, 2009. "Macroeconomic Patterns and Monetary Policy in the Run-up to Asset Price Busts," IMF Working Papers 09/252, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:09/252
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    References listed on IDEAS

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    Cited by:

    1. D. Filiz Unsal, 2013. "Capital Flows and Financial Stability: Monetary Policy and Macroprudential Responses," International Journal of Central Banking, International Journal of Central Banking, vol. 9(1), pages 233-285, March.
    2. Agur, Itai & Demertzis, Maria, 2013. "“Leaning against the wind” and the timing of monetary policy," Journal of International Money and Finance, Elsevier, vol. 35(C), pages 179-194.
    3. Paul De Grauwe, 2012. "A Fragile Eurozone in Search of a Better Governance," The Economic and Social Review, Economic and Social Studies, vol. 43(1), pages 1-30.
    4. Paul Bloxham & Christopher Kent & Michael Robson, 2010. "Asset Prices, Credit Growth, Monetary and Other Policies: An Australian Case Study," RBA Research Discussion Papers rdp2010-06, Reserve Bank of Australia.
    5. Agur, Itai & Demertzis, Maria, 2012. "Excessive bank risk taking and monetary policy," Working Paper Series 1457, European Central Bank.
    6. De Grauwe, Paul, 2011. "Governance of a Fragile Eurozone," CEPS Papers 5523, Centre for European Policy Studies.
    7. Itai Agur & Maria Demertzis, 2010. "Monetary Policy and Excessive Bank Risk Taking," DNB Working Papers 271, Netherlands Central Bank, Research Department.
    8. Zhang, Yiting & Lee, Gladys Hui Ting & Wong, Jian Cheng & Kok, Jun Liang & Prusty, Manamohan & Cheong, Siew Ann, 2011. "Will the US economy recover in 2010? A minimal spanning tree study," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 390(11), pages 2020-2050.

    More about this item

    Keywords

    Credit; Credit expansion; Asset prices; Monetary policy; Housing prices; Price increases; Stock prices; inflation; monetary fund; monetary conditions; central bank;

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