Monetary policy makers set policy in order to minimize deviations of actual inflation from some predetermined level while paying attention to deviations of output from potential. The extent to
which asset prices should be taken into account, when setting policy aimed at achieving the desired goal, has moved into the focus of academic debate, as low and stable consumer price inflation (at
least in OECD countries) has been achieved. There are several distinct possibilities regarding how asset prices can be incorporated when determining the interest rate (or the money supply). Two extreme approaches that can be taken are specifically targeting asset prices and “pricking asset bubbles” upon their emergence. These views however, have been rejected with sufficient consensus (Isssing, 2009). More moderate alternatives are the “leaning against the wind” approach and the orthodox view. “Leaning against the wind” implies tolerating a certain deviation from price stability while simultaneously attempting to prevent the emergence of a bubble (Kohn, 2006). The orthodox view says that asset prices should be ignored beyond their impact on consumer price inflation. When strong informational requirements and specific conditions are met, however, an argument for the “leaning against the wind” approach can be made. The probability that a bubble is correctly
identified must be high, the future growth of the bubble needs to be sensitive to interest rates and the economic inefficiencies arising from a burst of the bubble should rise with the size of the bubble
(Trichet, 2005). However, if these conditions are not met, central banks are likely to achieve higher macroeconomic stability by following the orthodox approach.
Inhaltsverzeichnis (Table of Contents)
- To what extent should monetary policy take asset prices into account?
- Introduction
- Targeting asset prices
- Pricking asset bubbles
- The orthodox view
- Leaning against the wind
- Conclusion
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This paper examines the extent to which monetary policy should take asset prices into account. The author explores various approaches to integrating asset prices into monetary policy, including targeting asset prices, pricking asset bubbles, the orthodox view, and "leaning against the wind." The main objective is to analyze the potential benefits and risks associated with each approach, ultimately determining the most effective strategy for achieving macroeconomic stability.Key Themes
- The Role of Asset Prices in Monetary Policy
- The Potential Benefits and Risks of Targeting Asset Prices
- The Orthodox View and its Limitations
- The "Leaning Against the Wind" Approach and its Potential Benefits
- The Importance of Macroeconomic Stability
Zusammenfassung der Kapitel (Chapter Summaries)
The paper begins by outlining the objectives of monetary policy, which include minimizing deviations of actual inflation from a predetermined level and maintaining output at its potential. The author then presents two extreme approaches to incorporating asset prices into monetary policy: targeting asset prices and pricking asset bubbles. Both approaches are rejected due to their potential negative consequences.
The paper then examines the orthodox view, which argues that asset prices should only be considered in so far as they provide information about expected inflation. This view, while widely accepted, faces challenges in identifying asset price bubbles and their underlying causes. The author further explores the "leaning against the wind" approach, which emphasizes the importance of reacting systematically to asset price misalignments, even when they don't directly signal inflation. This approach aims to prevent bubbles from forming and minimize their destabilizing effects on the economy.
Schlüsselwörter (Keywords)
The core themes and concepts explored in this paper include monetary policy, asset prices, inflation, macroeconomic stability, asset bubbles, the orthodox view, "leaning against the wind," and risk management. The text focuses on the trade-offs and challenges associated with integrating asset prices into monetary policy, particularly in light of the potential risks and limitations of each approach.- Citar trabajo
- Frederik Schröder (Autor), 2009, To what extent should monetary policy take asset prices into account?, Múnich, GRIN Verlag, https://www.grin.com/document/189033
