Measuring the Macroeconomic Risks Posed by Asset Price Booms

31 Pages Posted: 2 Oct 2006 Last revised: 20 Mar 2010

See all articles by Stephen G. Cecchetti

Stephen G. Cecchetti

Brandeis International Business School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: September 2006

Abstract

Modern central bankers are the risk managers of the financial system. They take actions based not only on point forecasts for growth and inflation, but based on the entire distribution of possible macroeconomic outcomes. In numerous instances monetary policymakers have acted in ways designed to avert disasters. What are the implications of this approach for managin the risks posed by asset price booms? To address this question, I study data from a cross-section of countries to examine the impact of equity and property booms on the entire distribution of deviation in output and price-level from their trends. The results suggest that housing booms worsen growth prospects, creating outsized risks of very bad outcomes. By contrast, equity booms have very little impact on the expected mean and variance of macroeconomic performance, but worsen the worst outcomes.

Suggested Citation

Cecchetti, Stephen G., Measuring the Macroeconomic Risks Posed by Asset Price Booms (September 2006). NBER Working Paper No. w12542. Available at SSRN: https://ssrn.com/abstract=932899

Stephen G. Cecchetti (Contact Author)

Brandeis International Business School ( email )

415 South Street
Waltham, MA 02453
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
212-720-8629 (Phone)
212-720-2630 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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