Asset price booms and monetary policy

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1、16June2003Preliminaryandincomplete.Assetpriceboomsandmonetarypolicy*CarstenDetkenandFrankSmets1.IntroductionFollowingalongbullmarketandtheexuberanceassociatedwiththeneweconomyboomofthe1990s,stockmarketindiceshavefallensharplyandpersistentlyoverthepasttwotothree

2、years.Historically,assetpricecrasheshaveoftenbeenassociatedwithsharpdeclinesineconomicactivityandfinancialinstability.Largefallsinassetpricescannotonlyhavesubstantialwealtheffectsonconsumption.Theyalsoreducecollateralvalues,whichmayleadtocutsinbanklending,there

3、byexacerbatingthefallinspendingandleadingtofurtherknock-oneffectsonassetprices,lendingandeconomicactivity.Whilesincethestartofthenewmillenniummanyindustrialcountrieshaveexperiencedeconomicslowdownsasstockpriceshavefallen,thecurrentdownturnshavenotbeenparticular

4、lysevereandthefinancialsectorhasbeenquiteresilient.Onepossiblefactoristhatinmanycountrieshousepriceshavecontinuedtorise.Nevertheless,policymakershavecomeunderpressurefornothavingrespondedearliertothebuild-upoftheassetpriceboom,therebypossiblypreventingor1allevi

5、atingthesubsequentbustanditseffectsoneconomicactivityandinflation.Inthispaperweaddressanumberofmonetarypolicyissuesassociatedwiththeoccurrenceoflargeassetpriceboomsandbusts.Thepaperhastwoobjectives.First,wewanttocharacterisetherealandfinancialdevelopmentssurrou

6、ndingassetpricebooms.FollowingtherecentworkbyBorioandLowe(2001),HelblingandTerrones(2003),BordoandJeanne(2002)and*EuropeanCentralBank.E-mail:Carsten.Detken@ecb.intandFrank.Smets@ecb.int.TheviewsexpressedaresolelyourownanddonotnecessarilyreflectthoseoftheEuropea

7、nCentralBank.Pleasedonotquotewithoutpriorconsentfromtheauthors.1See,forexample,Greenspan(2002).MishkinandWhite(2003),weidentifyassetpriceboomssincetheearly1970sandcharacterisewhathappensduringtheboomandimmediatelyfollowingit.Wedefineassetpriceboomsasaperiodinwh

8、ichaggregaterealassetpricesaremorethan10percentabovetheirrecursivelyestimatedHodrickPrescotttrend.Inlightofthediscussionabove,ourfocusisonthebehaviourofmonetarypolicyduringt