IDEAS home Printed from https://ideas.repec.org/a/ffe/journl/v6y2009i1p155-174.html
   My bibliography  Save this article

Why Do Monetary Policymakers Lean With the Wing During Asset Price Booms?

Author

Listed:
  • Wolfram Berger, Friedrich Kissmer

    (IESEG School of Management, Lille)

Abstract

In this paper we explore the optimal policy reaction to an asset price boom. Empirical evidence shows that the monetary policy stance is typically loose during asset price booms. Emplying a modified New Keneysian sticky price model we show that this policy of leaning with the wind can be attributed to the forward-looking nature of the private sector's expectations. Agents incorporate the macroeconomic consequences of a looming asset price bust in their expectations. The expectation-induced deviations of outpout and inflation from their targets enforce a monetary loosening before the bust occurs. Futhermore, we argue that a policy of benign neglect towards asset price movements, as often advanced by monetary practitioners, is (generally) not optimal in welfare terms.

Suggested Citation

  • Wolfram Berger, Friedrich Kissmer, 2009. "Why Do Monetary Policymakers Lean With the Wing During Asset Price Booms?," Frontiers in Finance and Economics, SKEMA Business School, vol. 6(1), pages 155-174, April.
    • Handle: RePEc:ffe:journl:v:6:y:2009:i:1:p:155-174
    as

    Download full text from publisher

    File URL: http://www.ffe.esc-lille.com/papers/Vol6-1ms118Berger.pdf
    Download Restriction: no
    ---><---

    More about this item

    Keywords

    monetary policy; asset prices; credit crunch; boom bust cycles; forward-looking behavior;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ffe:journl:v:6:y:2009:i:1:p:155-174. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sophie Bodo (email available below). General contact details of provider: http://www.ffe.esc-lille.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.