MONETARY POLICY AND ASSET PRICES: WHAT ROLE FOR CENTRAL BANKS IN NEW EU MEMBER STATES?

Jan Frait () and Luboš Komárek

Prague Economic Papers, 2007, vol. 2007, issue 1, pages 3-23

Abstract: The paper deals with the relationship between monetary policy and asset prices. Besides surveying the general discussion, it attempts to extend it to recent developments in the New Member States of the EU (NMS), namely the Czech Republic, Hungary, Poland and Slovakia (the EU4). After a brief description of the current macroeconomic situation in the NMS, the appropriate reaction of monetary policy to asset price bubbles is analysed and the main pros and cons associated with this reaction are summarized. Afterwards, the risks of asset market bubbles in the EU4 countries are evaluated. Since the capital markets are still underdeveloped and the real estate price boom seems to be a natural reaction to the initial undervaluation, the risks are viewed as rather small. The conclusion is thus that it is crucial for central banks in mature economies as well as in the NMS to conduct their monetary policies as well as their supervisory and regulatory roles in a way that does not promote the build-up of asset market bubbles. In exceptional times, central banks of small open economies must be ready to use monetary policy steps as a kind of insurance against the adverse effects of potential asset market bubbles.

Keywords: New EU Member States; monetary policy; central banking; asset markets (search for similar items in EconPapers)
JEL-codes: E52 E58 G12 (search for similar items in EconPapers)
Date: 2007
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Working Paper: Monetary Policy and Asset Prices: What Role for Central Banks in New EU Member States? (2006)
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