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Asset Prices, Financial and Monetary Stability: Exploring the Nexus

47 Pages Posted: 13 Dec 2005  

Claudio E. V. Borio

Bank for International Settlements (BIS) - Research and Policy Analysis

Philip William Lowe

Reserve Bank of Australia

Date Written: July 2002

Abstract

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.

Suggested Citation

Borio, Claudio E. V. and Lowe, Philip William, Asset Prices, Financial and Monetary Stability: Exploring the Nexus (July 2002). BIS Working Paper No. 114. Available at SSRN: https://ssrn.com/abstract=846305 or http://dx.doi.org/10.2139/ssrn.846305

Claudio E.V. Borio

Bank for International Settlements (BIS) - Research and Policy Analysis ( email )

CH-4002 Basel, Basel-Stadt
Switzerland

Philip William Lowe (Contact Author)

Reserve Bank of Australia ( email )

GPO Box 3947
Sydney, 2000
Australia

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