English, Article edition: Why Do Monetary Policymakers Lean With the Wing During Asset Price Booms? Wolfram Berger; Friedrich Kissmer

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Physical Description
  • article
Language
  • English

Edition details

Title
  • Why Do Monetary Policymakers Lean With the Wing During Asset Price Booms?
Author
  • Wolfram Berger
  • Friedrich Kissmer
Physical Description
  • article
Notes
  • 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.
  • monetary policy, asset prices, credit crunch, boom bust cycles, forward-looking behavior
  • RePEc:ffe:journl:v:6:y:2009:i:1:p:155-174
Language
  • English
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