THE ILLUSION OF STABILITY-LOW INFLATION IN A BUBBLE ECONOMY

Marcus Miller (), Ishita Mohanty and Lei Zhang ()

Manchester School, 2009, vol. 77, issue s1, pages 126-149

Abstract: Econometric studies show that changes in real house prices are strongly autocorrelated in the UK, giving rise to prolonged departures from equilibrium. What happens when arbitrage is 'broken' and house prices no longer reflect future fundamentals? Adding a bubble to capture the disequilibrium behaviour picked up by econometricians, we show that a narrow focus on consumer price inflation-while neglecting house price disequilibrium-may for some time create the appearance of stability. But, with the bubble distorting policy and the economy on the way up and wreaking havoc on the banking system when it bursts, this is an illusion. For a bubble economy, new instruments of policy (such dynamic capital requirements and loan-to-value limits) are clearly needed-together with clear mandates as to who regulates what. Copyright © 2009 The Authors. Journal compilation © 2009 Blackwell Publishing Ltd and The University of Manchester.

Date: 2009

Downloads: (external link)
http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-9957.2009.02122.x link to full text (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:bla:manchs:v:77:y:2009:i:s1:p:126-149

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=1463-6786

Access Statistics for this article

Manchester School is edited by Keith Blackburn

More articles in Manchester School from University of Manchester
Series data maintained by Christopher F. Baum ().