Why Do Monetary Policymakers Lean With the Wing During Asset Price Booms?

Friedrich Kissmer Wolfram Berger ()
Additional contact information
Friedrich Kissmer Wolfram Berger: IESEG School of Management, Lille

Frontiers in Finance and Economics, 2009, vol. 6, issue 1, 155-174

Abstract: In this paper we explore the optimal policy reaction to an asset price boom. Empirical evidence shows that the monetary policy stance is typically loose during asset price booms. Emplying a modified New Keneysian sticky price model we show that this policy of leaning with the wind can be attributed to the forward-looking nature of the private sector's expectations. Agents incorporate the macroeconomic consequences of a looming asset price bust in their expectations. The expectation-induced deviations of outpout and inflation from their targets enforce a monetary loosening before the bust occurs. Futhermore, we argue that a policy of benign neglect towards asset price movements, as often advanced by monetary practitioners, is (generally) not optimal in welfare terms.

Keywords: monetary policy; asset prices; credit crunch; boom bust cycles; forward-looking behavior (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 (search for similar items in EconPapers)
Date: 2009
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.ffe.esc-lille.com/papers/Vol6-1ms118Berger.pdf (application/pdf)

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: https://EconPapers.repec.org/RePEc:ffe:journl:v:6:y:2009:i:1:p:155-174

Access Statistics for this article

Frontiers in Finance and Economics is currently edited by Ephraim Clark

More articles in Frontiers in Finance and Economics from SKEMA Business School
Bibliographic data for series maintained by Sophie Bodo ( this e-mail address is bad, please contact ).