Document Type

Book Chapter

Publication Date

2012

Publication Title

New Perspectives on Asset Price Bubbles

Pages

34

Publisher Name

Oxford University Press

Publisher Location

New York

Abstract

This chapter examines whether or not monetary policy should respond to asset price bubbles. More specifically, it asks how central banks respond while an asset bubble is growing and how they respond after the bubble bursts. It begins with a general overview of asset bubbles that supports the existence of the real and financial sectors of an economy before discussing how the bursting of asset price bubbles may cause financial instability that often adversely affects the real sector of an economy. It then describes the normative vs. positive responses of a central bank to asset price bubbles, along with the concept of macroprudential regulation as an approach for leaning against asset bubbles. It argues that the high costs associated with the 2007–2009 financial crisis undermined the so-called Jackson Hole Consensus and that the new central bank policy paradigm appears to have shifted toward “leaning against bubbles”.

Comments

Author Posting. © Oxford University Press 2012. This chapter is posted here by permission of Oxford University Press for personal use, not for redistribution. The chapter was published in New Perspectives on Asset Price Bubbles, 2012, https://doi.org/10.1093/acprof:osobl/9780199844333.003.0016

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This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 License.

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