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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: cecchett@brandeis.edu
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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

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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.

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