Asset Prices, Inflation and Monetary Control - Re-inventing Money as a Policy Tool

Peter Spahn

No 323/2010, Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim from Department of Economics, University of Hohenheim, Germany

Abstract: Low inflation on goods markets provides no reliable precondition for asset-market stability; it might even promote the emergence of bubbles because interest rates and risk premia appear to be low. A further factor driving asset demand is easy availability of credit, which in turn roots in the banking system operating in a regime of endogenous central-bank money. A comparison of Bundesbank and ECB policies suggests that credit growth can be controlled more efficiently if rising interest rates are accompanied by some liquidity squeeze that supports the spillover of a monetary restriction to capital markets. The announcement effect of a central bank Charter including the goal of financial-market stability helps to deter private agents from excessive asset trading.

Keywords: open-market policy; asset-price bubble; euro money market; ECB strategy (search for similar items in EconPapers)
JEL-codes: E5 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2010-08
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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