Year: 2002
Type: report
Abstract: The link between monetary policy and asset price movements has been of perennial interest to policy makers.In this paper we consider the potential case for pre-emptive monetary restrictions when asset price reversals can have serious effects on real output.First, we provide some historical background on two famous asset price reversals: the U.S. stock market crash of 1929 and the bursting of the Japanese bubble in 1989.We then present some stylized facts on boom-bust dynamics in stock and property prices in developed economies.We then discuss the case for a pre-emptive monetary policy in the context of a stylized "Dynamic New Keynesian" framework with collateral constraints in the productive sector.We find that whether such a policy is warranted depends on the economic conditions in a complex, non-linear way.The optimal policy cannot be summarized by a simple policy rule of the type considered in the inflation-targeting literature.
DOI: 10.3386/w8966
Authors: Michael Bordo, Olivier Jeanne
Language: English
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W3121722277