Monetary Policy and Asset Prices: Does 'Benign Neglect' Make Sense?

By M. Bordo, Olivier Jeanne. Social Science Research Network, 2002

324 citations recorded by the source corpus.

The link between monetary policy and asset price movements has been of perennial interest to policymakers. In this paper, we consider the potential case for preemptive monetary restrictions when asset price reversals can have serious effects on real output. First, we present some stylized facts on boom-bust dynamics in stock and property prices in developed economies. We then discuss the case for a preemptive monetary policy in the context of a stylized model. We find that the optimal policy depends on the economic conditions in a complex, nonlinear way and cannot be summarized by a simple policy rule of the type considered in the inflation-targeting literature.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/4c9a08dbd5721de68e701b72dee344cec5ecc347

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Citations in the corpus

How Do Business and Financial Cycles Interact? (2011, unknown): “For example, output registers typically much higher growth rates during credit and house price booms than during typical 18 Bordo and Jeanne (2002) identify episodes of booms-busts in asset prices by considering deviations of moving averages of growth rates in asset prices from their long-run…”
Overborrowing and systemic externalities in the business cycle (2009, background): “…on next period state of nature; therefore, the social planner is not effectively introducing new risk markets, see Stiglitz,1982. dilemma in Bordo and Jeanne (2002) about how optimal monetary policy should respond to a credit boom: preventing a credit boom reduces the probability of a…”
Asset Price Booms and Monetary Policy (2004, background): “In a stylised model in which the likelihood and the severity of a possible financial crisis depends on the build-up of debt, Bordo and Jeanne (2002) find that the optimal monetary policy depends on the economic conditions, including the private sector’s beliefs, in a rather complex way.”
How does fiscal policy react to wealth composition and asset prices (2012, background): “While there has been a large number of studies devoted to the analysis of the reaction of monetary policy to asset price developments (Borio and Lowe, 2002; Bordo and Jeanne, 2002), the research on the behaviour of scal policy is far less developed and somewhat lagging.”
Liquidity Shocks and Asset Price Boom/Bust Cycles (2007, unknown): “5 Bordo and Jeanne (2002).”
Excess Money Growth and Inflation Dynamics (2008, background): “…environment, inflationary pressures normally associated with unsustainable developments in real and financial variables may take longer to emerge and symptoms may show up in advance in excessive credit and asset price growth (Bordo and Jeanne, 2002; Borio and Lowe, 2002; Machado and Sousa, 2006).”
Why Central Banks Should Not Burst Bubbles (2006, background): “…causes or at least leads to bubbles when the economy is already expanding, as Roubini claims (without statistical support for that position—Borio and Lowe (2002) and Detken and Smets (2004) would have found that correlation in their econometric exercises if it was there in the data), then normal…”