Measuring the Macroeconomic Risks Posed by Asset Price Booms

Stephen Cecchetti

No 12542, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E5 G0 (search for similar items in EconPapers)
Date: 2006-09
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-mac and nep-ure
Note: ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (31)

Published as Cecchetti, Stephen G. "The Brave New World Of Central Banking: Policy Challenges Posed By Asset Price Booms And Busts," National Institute Economic Review, 2006, v2006(196,Apr), 107-119.
Published as Measuring the Macroeconomic Risks Posed by Asset Price Booms , Stephen G. Cecchetti. in Asset Prices and Monetary Policy , Campbell. 2008

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