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Asset Prices, Financial Fragility, and Central Banking

  • Eric Tymoigne

The paper reviews the current literature on the subject in both the New Consensus and the Post Keynesian framework. It shows that both approaches give to central banks a wrong goal (inflation, distribution, curbing speculation, etc.) and a wrong instrument (interest rate rule). The paper claims that central banks should focus their attention on maintaining financial stability and leave other problems to public institutions better suited for this task. In doing so they should develop new tools of intervention and leave policy interest rates unchanged, close to or at zero percent. Central banks have been created to deal with financial matters (government finance and financial stability) and should stick to this. Central banks, then, have a large amount of improvements to make, both as reformers and as guides for the financial community. Their main instrument should be an analysis of the financial fragility of the financial system and of the different economic sectors. In this context, it is shown that the notion of ÒbubbleÓ does not matter for policy purposes, and that the current regulatory system lacks an institution that is able to deal effectively with solvency crisis.

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Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_456.

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Date of creation: Jun 2006
Date of revision:
Handle: RePEc:lev:wrkpap:wp_456
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  1. Giuseppe Fontana & Alfonso Palacio-Vera, 2002. "Monetary Policy Rules: What Are We Learning?," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 24(4), pages 547-568, July.
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  9. Stephen G Cecchetti, 2003. "What the FOMC Says and Does When the Stock Market Booms," RBA Annual Conference Volume, in: Anthony Richards & Tim Robinson (ed.), Asset Prices and Monetary Policy Reserve Bank of Australia.
  10. 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.
  11. Frederic S. Mishkin, 1990. "Asymmetric Information and Financial Crises: A Historical Perspective," NBER Working Papers 3400, National Bureau of Economic Research, Inc.
  12. Greg Hannsgen, 2003. "Minsky's Acceleration Channel and the Role of Money," Macroeconomics 0308003, EconWPA.
  13. L. Randall Wray, 1997. "Deficits, Inflation, and Monetary Policy," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 19(4), pages 543-571, July.
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  18. Gerhard Illing, 2001. "Financial Fragility, Bubbles and Monetary Policy," CESifo Working Paper Series 449, CESifo Group Munich.
  19. Bordo, Michael D & Jeanne, Olivier, 2002. "Monetary Policy and Asset Prices: Does 'Benign Neglect' Make Sense?," International Finance, Wiley Blackwell, vol. 5(2), pages 139-64, Summer.
  20. 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.
  21. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1987. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
  22. Ben Bernanke & Mark Gertler, 1987. "Financial Fragility and Economic Performance," NBER Working Papers 2318, National Bureau of Economic Research, Inc.
  23. Anna Schwartz, 2003. "Asset price inflation and monetary policy," Atlantic Economic Journal, International Atlantic Economic Society, vol. 31(1), pages 1-14, March.
  24. Goodhart, Charles & Hofmann, Boris, 2000. "Do Asset Prices Help to Predict Consumer Price Inflation?," Manchester School, University of Manchester, vol. 68(0), pages 122-40, Supplemen.
  25. L. R. Wray, 1990. "Money and Credit in Capitalist Economies," Books, Edward Elgar, number 474, April.
  26. Marvin Goodfriend, 1998. "Using the term structure of interest rates for monetary policy," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 13-30.
  27. Gilchrist, Simon & Leahy, John V., 2002. "Monetary policy and asset prices," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 75-97, January.
  28. Timothy Cogley, 1999. "Should the Fed take deliberate steps to deflate asset price bubbles?," Economic Review, Federal Reserve Bank of San Francisco, pages 42-52.
  29. 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.
  30. 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.
  31. Peter Kriesler & Marc Lavoie, 2007. "The New Consensus on Monetary Policy and its Post-Keynesian Critique," Review of Political Economy, Taylor & Francis Journals, vol. 19(3), pages 387-404.
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