Should Monetary Policy Respond to Asset Price Bubbles? Revisiting the Debate

Sushil Wadhwani

FMG Special Papers from Financial Markets Group

Abstract: We argue that central banks can improve macroeconomic performance by reacting to asset price misalignments over and above their reaction to fixed horizon inflation forecasts. This is because such countercyclical monetary policy tends to offset the impact on output and inflation of such bubbles. In addition, if it were know ex ante that monetary policy would LATW in this way, it might reduce the probability of bubbles arising at all.

Date: 2008-06
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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