Asset Price Inflation and Monetary Policy

Anna Schwartz

No 9321, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: It is crucial that central banks and regulatory authorities be aware of effects of asset price inflation on the stability of the financial system. Lending activity based on asset collateral during the boom is hazardous to the health of lenders when the boom collapses. One way that authorities can curb the distortion of lenders' portfolios during asset price booms is to have in place capital requirements that increase with the growth of credit extensions collateralized by assets whose prices have escalated. If financial institutions avoid this pitfall, their soundness will not be impaired when assets backing loans fall in value. Rather than trying to gauge the effects of asset prices on core inflation, central banks may be better advised to be alert to the weakening of financial balance sheets in the aftermath of a fall in value of asset collateral backing loans.

JEL-codes: E5 E6 (search for similar items in EconPapers)
Date: 2002-11
New Economics Papers: this item is included in nep-acc, nep-cba, nep-fin, nep-mon, nep-pke and nep-rmg
Note: ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (36)

Published as Schwartz, Anna J. " Asset Price Inflation and Monetary Policy." Atlantic Economic Journal 31, 1 (March 2003) 1-14.

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