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Should Monetary Policy Respond To Asset Price Bubbles? Revisiting the Debate

Published online by Cambridge University Press:  26 March 2020

Sushil Wadhwani
Sushil Wadhwani*
Affiliation:
CEO, Wadhwani Asset Management LLP
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Abstract

Recent events have highlighted the importance of asset prices to central bank decisions. We argue that, in response to asset price bubbles, central banks should ‘lean against the wind’ (LATW hereafter). Even if the bubbles themselves are not significantly affected by LATW, macroeconomic performance can be improved if monetary policy reacts to asset price misalignments over and above the reaction to fixed horizon inflation forecasts. In addition, it might reduce the probability of bubbles arising at all. This article restates the case for LATW, and reviews the debate. In particular I respond to various criticisms that have been made against LATW and briefly consider alternative policies designed to make the financial system less cyclical.

Keywords

Monetary policyasset pricebubblesJEL Classifications: E44 E52 E58 G10
Type
Articles
Information
National Institute Economic Review , Volume 206 , October 2008 , pp. 25 - 34
Copyright
Copyright © 2008 National Institute of Economic and Social Research

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