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Asset Prices, Financial Stability and Monetary Policy

Franklin Allen and Kenneth Rogoff ()
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Franklin Allen: University of PA

Working Papers from University of Pennsylvania, Wharton School, Weiss Center

Abstract: The theoretical and empirical literatures on monetary policy and real estate prices are rapidly evolving. There is considerable debate about whether monetary policy should play a role in forestalling dangerous real estate bubbles that have the potential to trigger financial crises. This paper provides a selective survey of this literature. The focus is on research that incorporates financial frictions and asset price bubbles that have the potential to create the discontinuous collapses that have been witnessed periodically. The possible role of macro-prudential regulation in controlling real estate prices is also discussed. Our conclusion is that monetary policy and macro-prudential regulation both need to be used to guard against real estate bubbles.

Date: 2011-02
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Handle: RePEc:ecl:upafin:11-39