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A Tale of Five Bubbles- Asset Price Inflation and Central Bank Policy in Historical Perspective

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  • Hans-Joachim Voth

Abstract

This paper examines five bubbles that eventually popped, and discuses the feasibility of central bank policy. In all cases, we find that monetary policy was too loose during the period when the bubble was developing, and that a determined switch from an accommodating to a tight stance caused "the music to stop". We argue that despite the severe real effects of asset bubbles in all five examples, the case for targeting them explicitly is weak. Policy was flawed because it failed to pay sufficient attention to the output gap. We also present a more formal test, showing that policy errors influence the conditional volatility of equity returns as estimated in GARCH-M models. The conclusion examines US policy today in the light of our historical findings.

Suggested Citation

  • Hans-Joachim Voth, 2000. "A Tale of Five Bubbles- Asset Price Inflation and Central Bank Policy in Historical Perspective," CEPR Discussion Papers 416, Centre for Economic Policy Research, Research School of Economics, Australian National University.
    • Handle: RePEc:auu:dpaper:416
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    File URL: https://www.cbe.anu.edu.au/researchpapers/CEPR/DP416.pdf
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    References listed on IDEAS

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    Cited by:

    1. Pamela Hall, 2011. "Is there any evidence of a Greenspan put?," Working Papers 2011-06, Swiss National Bank.
    2. West, L.k. & Agbola, W.F., 2005. "Causality Links Between Asset Prices And Cash Rate In Australia," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 2(3), pages 69-86.

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    More about this item

    Keywords

    CENTRAL BANKS ; FINANCIAL POLICY ; ECONOMIC MODELS;
    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

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