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Monetary Policy and Asset Prices: What Role for Central Banks in New EU Member States?

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  • Jan Frait
  • Luboš Komárek

Abstract

The paper deals with the relationship between monetary policy and asset prices. Besides surveying the general discussion, it attempts to extend it to recent developments in the New Member States of the EU (NMS), namely the Czech Republic, Hungary, Poland and Slovakia (the EU4). After a brief description of the current macroeconomic situation in the NMS, the appropriate reaction of monetary policy to asset price bubbles is analysed and the main pros and cons associated with this reaction are summarized. Afterwards, the risks of asset market bubbles in the EU4 countries are evaluated. Since the capital markets are still underdeveloped and the real estate price boom seems to be a natural reaction to the initial undervaluation, the risks are viewed as rather small. The conclusion is thus that it is crucial for central banks in mature economies as well as in the NMS to conduct their monetary policies as well as their supervisory and regulatory roles in a way that does not promote the build-up of asset market bubbles. In exceptional times, central banks of small open economies must be ready to use monetary policy steps as a kind of insurance against the adverse effects of potential asset market bubbles.

Suggested Citation

  • Jan Frait & Luboš Komárek, 2007. "Monetary Policy and Asset Prices: What Role for Central Banks in New EU Member States?," Prague Economic Papers, Prague University of Economics and Business, vol. 2007(1), pages 3-23.
    • Handle: RePEc:prg:jnlpep:v:2007:y:2007:i:1:id:294:p:3-23
    DOI: 10.18267/j.pep.294
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    10. Lawrence J. Christiano & Terry J. Fitzgerald, 2003. "The Band Pass Filter," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 435-465, May.
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    15. Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements.
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    Citations

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    Cited by:

    1. Michal Hlavacek & Lubos Komarek, 2009. "Housing Price Bubbles and their Determinants in the Czech Republic and its Regions," Working Papers 2009/12, Czech National Bank.
    2. repec:cnb:ocpubv:rb07/2 is not listed on IDEAS
    3. Michal Hlaváček & Luboš Komárek, 2010. "Rovnovážnost cen nemovitostí v České republice [Equilibrium Development of Housing Prices in the Czech Republic]," Politická ekonomie, Prague University of Economics and Business, vol. 2010(3), pages 326-342.
    4. Michal Hlavacek & Lubos Komarek, 2009. "Property Price Determinants in the Czech Regions," Occasional Publications - Chapters in Edited Volumes, in: CNB Financial Stability Report 2008/2009, chapter 0, pages 82-91, Czech National Bank.
    5. Harun UCAK & Ilhan OZTURK & Alper ASLAN, 2014. "An Examination of Fisher Effect for Selected New EU Member States," International Journal of Economics and Financial Issues, Econjournals, vol. 4(4), pages 956-959.
    6. Hosek, Jan & Komarek, Lubos & Motl, Martin, 2010. "Monetary Policy And Oil Prices," Economic Research Papers 270782, University of Warwick - Department of Economics.
    7. Luboš Komárek & Ivana Kubicová, 2011. "Možnosti identifikace bublin cen aktiv v české ekonomice [Methods of Identification Asset Price Bubbles In the Czech Economy]," Politická ekonomie, Prague University of Economics and Business, vol. 2011(2), pages 164-183.
    8. Jan Frait & Luboš Komárek & Zlatuše Komárková, 2011. "Monetary Policy in a Small Economy after Tsunami: A New Consensus on the Horizon?," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 61(1), pages 5-33, January.
    9. Lubos Komarek & Ivana Kubicová, 2011. "The Classification and Identification of Asset Price Bubbles," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 61(1), pages 34-48, January.
    10. repec:cnb:ocpubv:rb06/2 is not listed on IDEAS
    11. Jan Hošek & Luboš Komárek & Martin Motl, 2011. "Měnová politika a cena ropy [Monetary Policy and Price of Oil]," Politická ekonomie, Prague University of Economics and Business, vol. 2011(1), pages 22-46.
    12. Ivan Sutoris, 2020. "The Intertemporal Cost of Living and Dynamic Inflation: The Case of the Czech Republic," Working Papers 2020/9, Czech National Bank.

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    More about this item

    Keywords

    monetary policy; asset markets; central banking; New EU Member States;
    All these keywords.

    JEL classification:

    • 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
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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