Boom-Busts in Asset Prices, Economic Instability and Monetary Policy

39 Pages Posted: 19 Jul 2002

See all articles by Michael D. Bordo

Michael D. Bordo

Rutgers University, New Brunswick - Department of Economics; National Bureau of Economic Research (NBER)

Olivier Jeanne

International Monetary Fund (IMF) - Research Department; Ecole Nationale des Ponts et Chaussees (ENPC); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2002

Abstract

The link between monetary policy and asset price movements has been of perennial interest to policy makers. In this Paper we consider the potential case for pre-emptive monetary restrictions when asset price reversals can have serious effects on real output. First, we provide some historical background on two famous asset price reversals: the US stock market crash of 1929 and the bursting of the Japanese bubble in 1989. We then present some stylized facts on boom-bust dynamics in stock and property prices in developed economies. We then discuss the case for a pre-emptive monetary policy in the context of a stylized 'Dynamic New Keynesian' framework with collateral constraints in the productive sector. We find that whether such a policy is warranted depends on the economic conditions in a complex, non-linear way. The optimal policy cannot be summarized by a simple policy rule of the type considered in the inflation-targeting literature.

Keywords: Monetary policy, asset prices, credit crunch, Taylor Rule, bubble, new economy

JEL Classification: E44, E52, E58

Suggested Citation

Bordo, Michael D. and Jeanne, Olivier, Boom-Busts in Asset Prices, Economic Instability and Monetary Policy (May 2002). CEPR Discussion Paper No. 3398. Available at SSRN: https://ssrn.com/abstract=319004

Michael D. Bordo (Contact Author)

Rutgers University, New Brunswick - Department of Economics ( email )

New Brunswick, NJ
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Olivier Jeanne

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Room 10-548L
Washington, DC 20431
United States
202-623-4272 (Phone)
202-623-6334 (Fax)

Ecole Nationale des Ponts et Chaussees (ENPC) ( email )

28 rue des Saints-Pres
75007 Paris
France
+33 1 44 58 28 76 (Phone)
+33 1 44 58 28 80 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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