Monetary Policy and Asset Price Volatility: Should We Refill the Bernanke-Gertler Prescription?

Kenneth Kuttner

No 2011-04, Department of Economics Working Papers from Department of Economics, Williams College

Abstract: Bernanke and Gertler's influential 1999 article "Asset Price Bubbles and Monetary Policy" made the case that monetary policy should respond to asset prices only to the extent that they have implications for future inflation. This paper revisits that prescription in light of the 2007-09 financial crisis. After reviewing the Bernanke-Gertler logic, the paper surveys the recent evolution of views on the appropriate policy response to asset price fluctuations, and discusses the conditions under which a proactive policy would be justified. There is almost no discernible relationship between interest rates and stock and property prices across countries during the years leading up to the crisis, however. While a theoretical case could be made to give some weight to financial stability in setting monetary policy, the evidence presented in the paper suggests that incremental interest rate adjustments are unlikely to be effective in restraining excessive asset price appreciation.

JEL-codes: E44 E52 E58 G12 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2011-05, Revised 2011-06
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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