Hostname: page-component-848d4c4894-ttngx Total loading time: 0 Render date: 2024-05-06T09:31:32.327Z Has data issue: false hasContentIssue false
  • English
  • Français

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
Get access Rights & Permissions [Opens in a new window]

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

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.)

References

Allen, F. and Gale, D. (2000), ‘Bubbles and crises’, The Economic Journal, 110, January, pp. 236–55.CrossRefGoogle Scholar
Bean, C. (2003), ‘Asset prices, financial imbalances and monetary policy: are inflation targets enough?’, BIS Working Paper no. 140.Google Scholar
Bernanke, B. (2002), ‘Asset-price “bubbles” and monetary policy’, speech delivered at the New York Chapter of the National Association for Business Economics, New York, NY, 15 October.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
-(2001), ‘Should central banks respond to movements in asset prices?’, American Economic Review, May.Google Scholar
Borio, C. and Lowe, P. (2002), ‘Asset prices, financial and monetary stability: exploring the nexus’, BIS Working Papers, no 114.CrossRefGoogle Scholar
Cecchetti, S.G. (2006), ‘The brave new world of central banking: policy challenges posed by asset price booms and busts’, National Institute Economic Review, 196, April.CrossRefGoogle Scholar
Cecchetti, S.G., Genberg, H., Lipsky, J. and Wadhwani, S. (2000), Asset Prices and Central Bank Policy, Geneva Report on the World Economy 2, CEPR and ICMB.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: The Implications for Monetary, Regulatory and International Policies, MIT Press, pp. 427–44.CrossRefGoogle Scholar
Gertler, M. (1998) in Gertler, M., Goodfriend, M., Issing, O. and Spaventa, L., ‘Asset prices and monetary policy: four views’, Centre for Economic Policy Research (CEPR) and Bank for International Settlements (BIS) booklet, London, CEPR.Google Scholar
Goodhart, C. and Persaud, A. (2008), ‘A party pooper's guide to financial stability’, The Financial Times, June.Google Scholar
Greenspan, A. (1999), ‘Testimony to the Committee on Banking and Financial Services’, US House of Representatives, 22 July.Google Scholar
-(2007), The Age of Turbulence: Adventures in a New World, Allen Lane.Google Scholar
Gruen, D., Plumb, M. and Stone, A. (2005), ‘How should monetary policy respond to asset price bubbles’, International Journal of Central Banking, 3, 1, pp. 1–33.Google Scholar
Haugh, D. (2008), ‘Monetary policy under uncertainty about the nature of asset price shocks’, OECD, mimeo.Google Scholar
Heikensten, L. (2008), ‘More to it than just “leaning against the wind”’, The Financial Times, 5 June.Google Scholar
Issing, O. (1998), in Gertler, M., Goodfriend, M., Issing, O. and Spaventa, L., ‘Asset prices and monetary policy: four views’, Centre for Economic Policy Research (CEPR) and Bank for International Settlements (BIS) booklet, London, CEPR.Google Scholar
Kent, C. and Lowe, P. (1997), ‘Asset-price bubbles and monetary policy’, Research Discussion Paper, Reserve Bank of Australia, RDP 9709.Google Scholar
Kohn, D.R. (2006), ‘Monetary policy and asset prices’, speech delivered at ‘Monetary Policy: A Journey from Theory to Practice’, an ECB Colloquium held in honour of Otmar Issing, Frankfurt, Germany, 16 March.Google Scholar
Orphanides, A. (1998), ‘Monetary policy evaluation with noisy information’, Finance and Economics Discussion Paper 1998-50, Board of Governors of the Federal Reserve System.Google Scholar
Poole, W. (1970), ‘Optimal choice of monetary policy instruments in a simple stochastic macro model’, Quarterly Journal of Economics, 88, pp. 197–216.CrossRefGoogle Scholar
Stein, J.C. (2004), ‘Why are most funds open-end? Competition and the limits to arbitrage’, unpublished manuscript, Harvard University, January.CrossRefGoogle Scholar
Wadhwani, S.B. (1999a), ‘Currency puzzles’, Speech delivered at the London School of Economics, 16 September, www.bankofengland.co.uk.Google Scholar
-(1999b), ‘The US stock market and the global economic crisis’, National Institute Economic Review, January, pp. 86–105. -(2007), ‘The MPC: ten years old’, The Times, May.Google Scholar
White, W.R. (2006), ‘Procyclicality in the financial system: do we need a new macro financial stabilisation framework?’, BIS Working Papers no.193.Google Scholar