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Asset Price Instability and Policy Responses: The Legacy of Liberalisation

  • Stephen Bell

    ()

    (University of Queensland)

  • John Quiggin

    ()

    (Department of Economics, University of Queensland)

The debate about the dynamics and potential policy responses to asset inflation has intensified in recent years. Some analysts, notably Borio and Lowe, have called for 'subtle' changes to existing monetary targeting frameworks to try to deal with the problems of asset inflation and have attempted to developed indicators of financial vulnerability to aid this process. In contrast, this paper argues that the uncertainties involved in understanding financial market developments and their potential impact on the real economy are likely to remain too high to embolden policy makers. The political and institutional risks associated with policy errors are also significant. The fundamental premise that a liberalised financial system is based on 'efficient' market allocation cannot be overlooked. The corollary is that any serious attempt to stabilize financial market outcomes must involve at least a partial reversal of deregulation.

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Paper provided by Risk and Sustainable Management Group, University of Queensland in its series Australian Public Policy Program Working Papers with number WPP04_3.

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Date of creation: Jun 2004
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Handle: RePEc:rsm:pubpol:p04_3
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  1. Barry Eichengreen & Carlos Arteta, 2001. "Banking Crises in Emerging Markets: Presumptions and Evidence," Macroeconomics 0012012, EconWPA.
  2. Burton G. Malkiel, 2003. "The Efficient Market Hypothesis and Its Critics," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 59-82, Winter.
  3. repec:fth:sydnec:99-19 is not listed on IDEAS
  4. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-48, December.
  5. Goodhart, Charles, 2001. "What Weight Should Be Given to Asset Prices in the Measurement of Inflation?," Economic Journal, Royal Economic Society, vol. 111(472), pages F335-56, June.
  6. C. Goodhart, 2001. "What Weight Should be Given to Asset Prices in the Measurementof Inflation?," DNB Staff Reports (discontinued) 65, Netherlands Central Bank.
  7. Alchian, Armen A & Klein, Benjamin, 1973. "On a Correct Measure of Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 5(1), pages 173-91, Part I Fe.
  8. Anna J. Schwartz, 2002. "Asset Price Inflation and Monetary Policy," NBER Working Papers 9321, National Bureau of Economic Research, Inc.
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