TY  - JOUR
AU  - Bordo,Michael D.
AU  - Jeanne,Olivier
TI  - Boom-Busts in Asset Prices, Economic Instability, and Monetary Policy
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8966
PY  - 2002
Y2  - May 2002
UR  - http://www.nber.org/papers/w8966
L1  - http://www.nber.org/papers/w8966.pdf
N1  - Author contact info:
Michael D. Bordo
Department of Economics
Rutgers University
New Jersey Hall
75 Hamilton Street
New Brunswick, NJ 08901
Tel: 732/822-7152
Fax: 732/932-7416
E-Mail: bordo@econ.rutgers.edu

Olivier Jeanne
Department of Economics
Johns Hopkins University
454 Mergenthaler Hall
3400 N. Charles Street
Baltimore, MD 21218
Tel: 410/516-7604
Fax: 410/516-7600
E-Mail: ojeanne@jhu.edu
AB  - The link between monetary policy and asset price movements has been of perennial interest to policy makers. In this paper we consider the potential case for pre-emptive monetary restrictions when asset price reversals can have serious effects on real output. First, we provide some historical background on two famous asset price reversals: the U.S. stock market crash of 1929 and the bursting of the Japanese bubble in 1989. We then present some stylized facts on boom-bust dynamics in stock and property prices in developed economies. We then discuss the case for a pre-emptive monetary policy in the context of a stylized 'Dynamic New Keynesian' framework with collateral constraints in the productive sector. We find that whether such a policy is warranted depends on the economic conditions in a complex, non-linear way. The optimal policy cannot be summarized by a simple policy rule of the type considered in the inflation-targeting literature.
ER  -