Hostname: page-component-cd9895bd7-fscjk Total loading time: 0 Render date: 2024-12-25T02:36:54.689Z Has data issue: false hasContentIssue false
  • English
  • Français

The Brave new World of Central Banking: Polcy Challenges posed by Asset Price Booms and Busts

Published online by Cambridge University Press:  26 March 2020

Stephen G. Cecchetti
Stephen G. Cecchetti*
Affiliation:
Barbara and Richard M. Rosenberg Professor of Global Finance, International Business School Brandeis University; and Research Associate, National Bureau of Economic Research.
*
e-mail: [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

At the dawn of the 21st century, property and equity ownership are spread more broadly across the population than they once were. One consequence of this is that asset price booms and crashes now have a direct impact on general welfare. The fact that bubbles distort nearly all economic decisions gives policymakers a stronger interest in asset price stability. In this article I examine the theoretical and empirical case for the existence of equity and property bubbles, and then summarise the economic distortions that they create. The evidence suggests increasing our attention to property prices. I go on to discuss the possible policy responses, including examining the consequences of changing the way in which housing is included in standard aggregate price measures.

Keywords

Central bank policyequity price bubbleshousing price bubblesE5G0
Type
Articles
Information
National Institute Economic Review , Volume 196 , 01 April 2006 , pp. 107 - 119
Copyright
Copyright © 2006 National Institute of Economic and Social Research

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

This essay was prepared for a special issue of the Economic Review of the National Institute of Economic and Social Research, London, UK. I would like to thank my previous collaborators Michael Bryan, Alfonso Flores-Lagunes, Hans Genberg, Stefan Krause, John Lipsky, Roisin O'Sullivan, and Sushil Wadhwani; as well as Brian Henry, John Campbell, Blake LeBaron, Richard Peach, Jeremy Stein, Alan Viard and Martin Weale for their patience and help.

References

Bean, C. (2003), ‘Asset prices, financial imbalances and monetary policy’, in Richards, A. and Robinson, T. (eds), Asset Prices and Monetary Policy, Proceedings of the Research Conference of the Reserve Bank of Australia, November, pp. 48–76.Google Scholar
Bernanke, B.S. (2002), ‘Asset-price ‘bubbles’ and monetary policy’, Remarks before the New York Chapter of the National Association of Business Economics, October 15.Google Scholar
Bernanke, B. and Gertler, M. (1999), ‘Monetary policy and asset price volatility’, in New Challenges for Monetary Policy: A Symposium Sponsored by the Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pp. 77–128.Google Scholar
Bernanke, B. and Gertler, M. (2001), ‘Should central banks respond to movements in asset prices?’, American Economic Review, 91, 2, May, pp. 253–7.CrossRefGoogle Scholar
Bertaut, C. (2002), ‘Equity prices, household wealth, and consumption growth in foreign industrial countries’, International Finance Discussion Papers 724, Washington, Board of Governors of the Federal Reserve System.CrossRefGoogle Scholar
Bollard, A. (2004), ‘Asset prices and monetary policy’, Reserve Bank of New Zealand Bulletin, 67, 1, March, pp. 27–34.Google Scholar
Borio, C. and Lowe, P. (2002), ‘Asset prices, financial and monetary stability: exploring the Nexus’, Bank for International Settlements Working Paper No. 114, July.CrossRefGoogle Scholar
Bryan, M.F., Cecchetti, S.G. and O'Sullivan, R. (2002), ‘A stochastic cost-of-life index’, in Hunter, W.C., Kaufman, G.G. and Pomerleano, M. (eds), Asset Price Bubbles: Implications for Monetary, Regulatory, and International Policies, Cambridge, Mass., MIT Press, pp. 277–90.Google Scholar
Campbell, J.Y. and Cocco, J. (2005), ‘How do house prices affect consumption? Evidence from micro data’, NBER Working Paper 11534.CrossRefGoogle Scholar
Case, K.E., Quigley, J.M. and Shiller, R.J. (2005), ‘Comparing wealth effects: the stock market versus the housing market’, Advances in Macroeconomics, 5, 1.CrossRefGoogle Scholar
Cassidy, J. (2002), Dot.con: The Greatest Story Ever Sold, New York, HarperCollins.Google Scholar
Cecchetti, S.G. (1998), ‘Understanding the Great Depression: lessons for current policy’, in Wheeler, M. (ed.), The Economics of the Great Depression, Kalamazoo, Michigan, W.E. Upjohn Institution for Employment Research.Google Scholar
Cecchetti, S.G. (2003), ‘What the FOMC says and does when the Stock Market booms’, in Richards, A. and Robinson, T. (eds), Asset Prices and Monetary Policy, Proceedings of the Research Conference of the Reserve Bank of Australia, November, pp. 77–96.Google Scholar
Cecchetti, S.G., Genberg, H., Lipsky, J. and Wadhwani, S. (2000), Asset Prices and Central Bank Policy, Geneva Reports on the World Economy, No. 2, International Center for Monetary and Banking Studies and Centre for Economic Policy Research, July.Google Scholar
Cecchetti, S.G., Genberg, H. and Wadhwani, S. (2002), ‘Asset prices in a flexible inflation targeting framework’, in Hunter, W.C., Kaufman, G.G. and Pomerleano, M. (eds), Asset Price Bubbles: Implications for Monetary, Regulatory, and International Policies, Cambridge, Mass., MIT Press, pp. 427–44.Google Scholar
Dupor, B. (2002), ‘Nominal price versus asset price stabilization’, unpublished manuscript, The Wharton School, University of Pennsylvania.Google Scholar
Greenspan, A. (2002), ‘Opening remarks’, Proceedings of the Federal Reserve Bank of Kansas City's Jackson Hole Conference, August.Google Scholar
Gruen, D., Plumb, M. and Stone, A. (2003), ‘How should monetary policy respond to asset price bubbles’, in Richards, A. and Robinson, T. (eds), Asset Prices and Monetary Policy, Proceedings of the Research Conference of the Reserve Bank of Australia, November, pp. 260–80.Google Scholar
International Monetary Fund (2003), World Economic Outlook, Washington, D.C., International Monetary Fund, April.Google Scholar
King, M. (2004), ‘Comments on ‘Risk and Uncertainty in Monetary Policy’ by Alan Greenspan’, American Economic Review, 94, 2, May.Google Scholar
Kishor, N.K. (2005), ‘Does consumption respond more to housing wealth than to financial wealth? If so, why?’, unpublished manuscript, Department of Economics, University of Washington, June.CrossRefGoogle Scholar
LeRoy, S.F. (2004), ‘Rational exuberance’, Journal of Economic Literature, 42, 3, September, pp. 783–804.CrossRefGoogle Scholar
McCarthy, J. and Peach, R.W. (2004), ‘Are home prices the next bubble?’, Economic Policy Review, 10, 3, December.Google Scholar
Norman, B., Sebastia-Barriel, M. and Weeken, O. (2002), ‘Equity wealth and consumption – the experience of Germany, France and Italy in an international context’, Bank of England Quarterly Review, Spring, pp. 78–85.Google Scholar
Shiller, R.J. (2005), Irrational Exuberance, 2nd Edition, Princeton University Press, updated.Google Scholar
Stein, J.C. (2004), ‘Why are most funds open-end? Competition and the limits to arbitrage’, unpublished manuscript, Harvard University, January.CrossRefGoogle Scholar
Svensson, L.E.O. (1999), ‘Inflation targeting: some extensions’, Scandinavian Journal of Economics, 101(3), pp. 337–61.CrossRefGoogle Scholar