A Tale of Five Bubbles- Asset Price Inflation and Central Bank Policy in Historical Perspective

Hans-Joachim Voth

No 416, CEPR Discussion Papers from Centre for Economic Policy Research, Research School of Economics, Australian National University

Abstract: This paper examines five bubbles that eventually popped, and discuses the feasibility of central bank policy. In all cases, we find that monetary policy was too loose during the period when the bubble was developing, and that a determined switch from an accommodating to a tight stance caused "the music to stop". We argue that despite the severe real effects of asset bubbles in all five examples, the case for targeting them explicitly is weak. Policy was flawed because it failed to pay sufficient attention to the output gap. We also present a more formal test, showing that policy errors influence the conditional volatility of equity returns as estimated in GARCH-M models. The conclusion examines US policy today in the light of our historical findings.

Keywords: CENTRAL BANKS; FINANCIAL POLICY; ECONOMIC MODELS (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2000-05
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:auu:dpaper:416

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