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Monetary Policy, Market Excesses and Financial Turmoil

Author

Listed:
  • Rudiger Ahrend

    (OECD)

  • Boris Cournède

    (OECD)

  • Robert Price

    (OECD)

Abstract

This paper addresses the question of whether and how monetary policy ease may lead to excesses in financial and real asset markets and ultimately result in financial dislocation. It presents evidence suggesting that periods when short-term interest rates have been persistently and significantly below what Taylor rules would prescribe are correlated with increases in asset prices, especially as regards housing, though no systematic effects are identified on equity markets. Significant asset price increases, however, can also occur when interest rates are in line with Taylor rules, associated with periods of financial deregulation and/or innovation. The paper argues that accommodating monetary policy over the period 2002-2005, in combination with rapid financial market innovation, would seem in retrospect to have been among the factors behind the run-up in asset prices and consequent financial imbalances -- the (partial) unwinding of which helped trigger the 2007 financial market turmoil. Moreover, the paper points out that in certain situations policy rates may be a rather blunt tool for dealing with both the build-up and aftermath of financial imbalances, raising the question whether “macro-prudential” regulation could be useful. Politique monétaire, excès des marchés et troubles financiers Dans quelle mesure la politique monétaire a-t-elle pu conduire à des excès dans les marchés d'actifs réels et financiers et in fine mener aux récentes perturbations financières ? Cette étude aborde cette question en fournissant des éléments qui laissent à penser que, lorsque les taux courts se trouvent de manière durable nettement au-dessous de ce que prescrirait une règle de Taylor, les prix des actifs, notamment immobiliers, ont tendance à s'élever (hormis ceux des actions). D'importantes augmentations des prix des actifs sont aussi observées lors des périodes de dérégulation ou d'innovation financières. Cette étude avance des arguments selon lesquels le relâchement monétaire observé en 2002-2005, se combinant à une rapide innovation financière, apparaît rétrospectivement comme l'un des facteurs ayant contribué à l'envolée des prix des actifs et au gonflement des déséquilibres financiers qui en a résulté, un processus dont la résorption a alimenté les troubles financiers de 2007. En outre, cette étude souligne que, dans certaines situations, les taux directeurs sont un instrument peu adapté pour répondre à la formation et au dégonflement de déséquilibres financiers, ce qui soulève la question de savoir si la réglementation « macro-prudentielle » ne serait pas alors plus utile.

Suggested Citation

  • Rudiger Ahrend & Boris Cournède & Robert Price, 2008. "Monetary Policy, Market Excesses and Financial Turmoil," OECD Economics Department Working Papers 597, OECD Publishing.
  • Handle: RePEc:oec:ecoaaa:597-en
    DOI: 10.1787/244200148201
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    References listed on IDEAS

    as
    1. 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.
    2. Stephen G. Cecchetti, 2008. "Measuring the Macroeconomic Risks Posed by Asset Price Booms," NBER Chapters, in: Asset Prices and Monetary Policy, pages 9-43, National Bureau of Economic Research, Inc.
    3. Charles Bean, 2003. "Asset Prices, Financial Imbalances and Monetary Policy: Are Inflation Targets Enough?," RBA Annual Conference Volume (Discontinued), in: Anthony Richards & Tim Robinson (ed.),Asset Prices and Monetary Policy, Reserve Bank of Australia.
    4. Boris Cournède & Rudiger Ahrend & Robert Price, 2008. "Have Long-term Financial Trends Changed the Transmission of Monetary Policy?," OECD Economics Department Working Papers 634, OECD Publishing.
    5. Cecchetti, Stephen G., 2006. "The Brave new World of Central Banking: Polcy Challenges posed by Asset Price Booms and Busts," National Institute Economic Review, Cambridge University Press, vol. 196, pages 107-119, April.
    6. Detken, Carsten & Smets, Frank, 2004. "Asset price booms and monetary policy," Working Paper Series 364, European Central Bank.
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    11. Rudiger Ahrend & Pietro Catte & Robert Price, 2006. "Factors Behind Low Long-Term Interest Rates," OECD Economics Department Working Papers 490, OECD Publishing.
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    More about this item

    Keywords

    asset prices; crise des prêts hypothécaires à risque; déséquilibres financiers; financial imbalances; financial innovation; financial markets; house prices; housing; innovation financière; interest rate; logement; marchés financiers; market turmoil; monetary policy; politique monétaire; prix des actifs; regulation; réglementation macro-prudentielle; sub-prime crisis; taux d'intérêt; Taylor rule; troubles financiers;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F3 - International Economics - - International Finance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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