Asset Price Bubbles and Central Bank Policies: The Crash of the 'Jackson Hole Consensus'

NEW PERSPECTIVES ON ASSET PRICE BUBBLES: THEORY, EVIDENCE, AND POLICY, Doug Evanoff, George Kaufman and A.G. Malliaris, eds., Oxford University Press, 2012

34 Pages Posted: 14 Oct 2011

See all articles by A. (Tassos) G. Malliaris

A. (Tassos) G. Malliaris

Loyola University of Chicago - Department of Economics

Date Written: October, 13 2011

Abstract

This paper reexamines the main arguments of whether or not monetary policy should respond to asset bubbles. The question of how the central bank should respond to an asset bubble can be reformulated in two ways. First, how does the central bank respond while an asset bubble is growing, and second, how does it respond after the bubble bursts? There has been strong agreement among economists that a central bank should respond to the bursting of a bubble by aggressively decreasing the Fed funds rate to minimize the adverse impact of financial instability on the real economy. However, there is no clear answer to the question of how the central bank should respond to an asset bubble before it bursts. If there is evidence that the asset price bubble is contributing to inflation, then there is general agreement that the central bank should respond. But what if prices remain stable? These issues are critically reviewed and the conclusion is reached that the high costs associated with the 2007–2009 financial crisis have encouraged the development of a new central bank policy paradigm that encourages “leaning against bubbles” and giving due consideration to alternative tools other than interest rate policy tools.

Keywords: Asset Bubbles, Financial Crisis, Jackson Hole Consensus, Lean against Bubbles

JEL Classification: E50, E52, E58

Suggested Citation

Malliaris, A. (Tassos) G., Asset Price Bubbles and Central Bank Policies: The Crash of the 'Jackson Hole Consensus' (October, 13 2011). NEW PERSPECTIVES ON ASSET PRICE BUBBLES: THEORY, EVIDENCE, AND POLICY, Doug Evanoff, George Kaufman and A.G. Malliaris, eds., Oxford University Press, 2012. Available at SSRN: https://ssrn.com/abstract=1943700 or http://dx.doi.org/10.2139/ssrn.1943700

A. (Tassos) G. Malliaris (Contact Author)

Loyola University of Chicago - Department of Economics ( email )

16 E. Pearson Ave
Quinlan School of Business
Chicago, IL 60611
United States
312-915-6063 (Phone)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
184
Abstract Views
737
rank
175,759
PlumX Metrics