Asset-Price Boom-Bust Cycles and Credit: What is the Scope of Macro-Prudential Regulation?

65 Pages Posted: 27 Jun 2010

See all articles by Vladimir Borgy

Vladimir Borgy

Banque de France

Laurent Clerc

Banque de France

Jean-Paul Renne

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne)

Date Written: December 1, 2009

Abstract

Over the recent months, several initiatives have taken place to develop macro-prudential regulation in order to prevent systemic risk and the built-up of financial imbalances. Crucial to the success of such policy is the ability of the macro-prudential authority to identify in due time such imbalances, generally featured by asset-price boom-bust cycles. In this paper, we investigate the possibility of detecting asset-price booms according to alternative identification strategies and assess their robustness. We infer the probability that an asset-price boom turns into an asset-price bust. In addition, we try to disentangle costless or low-cost from costly asset-price booms. We find some evidence that house price booms are more likely to turn into costly recession than stock price booms. Resorting both to a non-parametric approach and a discrete-choice (logit) model, we analyze the ability of a set of indicators to robustly explain costly asset-price booms. According to our results, real long-term interest rates, total investment, real credit and real stock prices tend to increase the probability of a costly housing-price boom, whereas real GDP and house prices tend to increase the probability of a costly stock-price boom. Regarding the latter, credit variables tend to play a less convincing role. From this perspective, we specify the scope of macro-prudential regulation as a set of tools aiming at avoiding "costly" asset-price booms. In doing so, we try both to make the case for state-contingent macro-prudential regulations and to set out clear delineation between monetary and financial stability objectives.

Keywords: Early Warning Indicators, Discrete-Choice Model, Asset Price Booms and Busts, Macro-prudential Regulation, Leaning Against the Wind Policies

JEL Classification: E37, E44, E51

Suggested Citation

Borgy, Vladimir and Clerc, Laurent and Renne, Jean-Paul, Asset-Price Boom-Bust Cycles and Credit: What is the Scope of Macro-Prudential Regulation? (December 1, 2009). Banque de France Working Paper No. 263, Available at SSRN: https://ssrn.com/abstract=1630093 or http://dx.doi.org/10.2139/ssrn.1630093

Vladimir Borgy (Contact Author)

Banque de France ( email )

Paris
France

Laurent Clerc

Banque de France ( email )

Paris
France

Jean-Paul Renne

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

UNIL, Batiment Internef
Lausanne, 1015
Switzerland

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