Abstract
How should central banks view movements in equity, housing, and foreign exchange markets? Can policy makers improve economic performance by paying attention to asset prices, in addition to inflation and output forecasts? Is it possible to identify asset price misalignments and bubbles? Should asset prices be included in inflation measures? Is it possible to use non-conventional policies to address asset price misalignments?
This seminar will address these questions and provide the following answers: Yes, a central bank concerned with stabilizing inflation and growth can achieve superior performance by adjusting its policy instruments in response not only to its inflation forecast and the output gap, but to asset prices as well. But the reaction to asset prices will depend on why they have changed, with responses to increases in productivity growth being very different from responses to misalignments or bubbles. Second, although asset price misalignments clearly exist and are difficult to measure, this should be no reason to ignore them. Third, inflation measures should take better account of changes in housing prices, but stock price movements are best left out of inflation indices. And fourth, non-conventional policies, such as adjusting margin requirements and taxing or limiting loan-to-value ratios on mortgages, may succeed in reducing asset price volatility.