Asset Price Booms and Monetary Policy

By C. Detken, Frank Smets. Social Science Research Network, 2004

320 citations recorded by the source corpus.

The paper aims at deriving some stylised facts for financial, real, and monetary policy developments during asset price booms by means of aggregating information contained in 38 boom periods since the 1970s for 18 OECD countries. We observe 26 macroeconomic variables in a pre-boom, boom and post-boom phase. Not all booms lead to large output losses. We divide our sample in high-cost and low-cost booms and analyse the differences. High-cost booms are clearly those in which real estate prices and investment crash in the post-boom periods. In general it is difficult to distinguish a high-cost from a low-cost boom at an early stage. However, high-cost booms seem to follow very rapid growth in the real money and real credit stocks just before the boom and at the early stages of a boom. During high-cost booms, rates of change of real estate prices and consumption growth are significantly higher and the investment (especially housing) GDP ratio deviation from trend rises faster over the whole boom period. There is also evidence that high-cost booms are associated with significantly looser monetary policy conditions over the boom period, especially towards the late stage of a boom. We finally discuss the results with regard to the theoretical literature. The looser monetary policy at the later stage of high-cost booms could be interpreted in different ways. It could be that excessively loose monetary policy contributes to extending the boom and exacerbating the real and financial imbalances. Alternatively, observed monetary policy could reflect a desirable, pre-emptive loosening in anticipation of an asset price crash to come. JEL Classification: E44, E52, E58

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/5436c825323c3a7f8b6f2c5ad026577aa3929184

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Citations in the corpus

Excess Money Growth and Inflation Dynamics (2008, methodology): “In support of our interpretation, Detken and Smets (2004) and Helbling and Terrones (2003) in their analyses of asset price booms and busts find evidence that booms (in particular those followed by sharp reductions in the GDP growth rate) are accompanied by easy monetary and credit conditions and…”
Liquidity Shocks and Asset Price Boom/Bust Cycles (2007, unknown): “Our method to identify boom periods is a refined version of the one suggested in Detken and Smets (2004), since here we use quarterly instead of annual data.”
How does fiscal policy react to wealth composition and asset prices (2012, background): “…2010; Agnello and Schuknecht, 2011) and a number of studies has focused on the appropriateness of the monetary policy strategy in the presence of such episodes (Detken and Smets, 2004) and, in general, on the opportunity to consider asset prices as part of monetary policy goals (Issing, 2009).”
Housing Finance in the Euro Area (2009, background): “While the large and growing body of literature on these issues has generally not yet reached a consensus, there is increasing evidence in support of a close link between monetary and credit aggregates, on the one hand, and house prices, on the other (see, for instance, Detken and Smets (2004)).”
Asset Price Misalignments and the Role of Money and Credit (2010, methodology): “Finally, by making data available for several thousand units, panel data can minimize the bias that might result if we aggregate individuals or firms into broad aggregates.”
A Tale of Two Decades: The Ecb's Monetary Policy at 20 (2019, background): “” 104 For a more formal analysis, see for instance Detken and Smets (2004). Chart 3.”
Time-varying monetary-policy rules and financial stress: Does financial instability matter for monetary policy? (2011, background): “Detken and Smets (2004) summarize some stylized facts on macroeconomic and monetary policy developments during asset price booms.”
Macroprudential Policy - A Literature Review (2012, unknown): “A somewhat more nuanced view is found in Bean (2003, 2004, 2007, 2009) and Detken and Smets (2004).”
Optimal interest rate rules, asset prices, and credit frictions (2005, background): “QtKt+1 = μ 1 1− ψt(Γ( t+1)− μM( t+1)) ¶ NWt+1 (12)”
Monetary and Prudential Policies at a Crossroads? New Challenges in the New Century (2006, result): “The existence of this link has also been supported by more rigorous empirical evidence.13 The ex post output costs associated with the booms and busts have also received considerable attention (IMF (2003), Detken and Smets (2004), Cecchetti (2006)).”
House Prices, Money, Credit and the Macroeconomy (2008, unknown): “11 See Borio and Lowe (2004), Detken and Smets (2004) and Adalid and Detken (2007).”
Assessing excess liquidity in the euro area: the role of sectoral distribution of money (2011, background): “…economy, whenever the build-up of the financial bubble is associated with excess credit and liquidity conditions (e.g. Borio and Lowe, 2002, 2004; Detken and Smets, 2004; Adalid and Detken, 2006). derive a more accurate breakdown of M3, as it is based on financial liabilities of both Monetary…”