(DOWNLOAD) "Monetary Policy, Bubbles, And the Knowledge Problem." by The Cato Journal # eBook PDF Kindle ePub Free
eBook details
- Title: Monetary Policy, Bubbles, And the Knowledge Problem.
- Author : The Cato Journal
- Release Date : January 22, 2011
- Genre: Politics & Current Events,Books,
- Pages : * pages
- Size : 237 KB
Description
The role of monetary policy in creating, not merely responding to, asset price bubbles is a provocative topic of relevance to central banking requiring empirical analysis. The tenor of the times following the global financial crisis is to take that extreme premise as a given, and to advocate a policy response of tightening monetary policy preemptively to prevent or pop bubbles--that is, to lean against the wind. Leading expressions of this view, set out before the current consensus emerged, include Bordo and Jeanne (2002); Borio and Lowe (2002); Borio and White (2003); Cecchetti, Genberg, and Wadhwani (2002); Roubini (2006); and White (2006, 2009), As argued in Posen (2009), however, the success of such a policy depends upon three empirically testable assumptions: first, that we can discern bubbles in real time from among the ongoing fluctuations in asset prices before it is too late; second, that the monetary instruments available to central banks do affect asset prices in a dependable fashion; and third, that it is worth it on net to preempt bubbles, despite the potential costs from lost output and increased volatility of doing so. Amidst the understandable public outrage in the United States and elsewhere regarding the aftermath of the 2008-09 crash, it is easy to rush to judgment on monetary policy and to forget that all three of these assumptions remain far from established. Previously, several researchers have taken on the second assumption, and offered cross-national evidence that monetary policy instruments do not predictably or dependably influence asset prices. (1) Analyses of the bubble of the 1980s in Japan, often held up as the paradigmatic example of a missed opportunity to preempt an asset price boom with monetary tightening (or even of a bubble caused by monetary laxity), show that the case does not fit the paradigm--not least because real estate prices there rose by 50 percent in two years prior to monetary loosening, and continued rising after monetary tightening began. (2) One implication is that if small open economies facing apparent bubbles at present driven by capital inflows raise interest rates by anything short of hundreds of basis points, they will only attract more inflows and exacerbate their problems (Posen 2010).
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