Asset Prices, Financial and Monetary Stability: Exploring the Nexus
Claudio E. V. Borio
Bank for International Settlements (BIS) - Research and Policy Analysis
Philip William Lowe
Reserve Bank of Australia
BIS Working Paper No. 114
This paper argues that financial imbalances can build up in a low inflation environment and that in some circumstances it is appropriate for policy to respond to contain these imbalances. While identifying financial imbalances ex ante can be difficult, this paper presents empirical evidence that it is not impossible. In particular, sustained rapid credit growth combined with large increases in asset prices appears to increase the probability of an episode of financial instability. The paper also argues that while low and stable inflation promotes financial stability, it also increases the likelihood that excess demand pressures show up first in credit aggregates and asset prices, rather than in goods and services prices. Accordingly, in some situations, a monetary response to credit and asset markets may be appropriate to preserve both financial and monetary stability.
Number of Pages in PDF File: 47working papers series
Date posted: November 11, 2005
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