Should central banks target property and asset price inflation?
Monetary policy shares at least some of the responsibility for the recent financial turmoil. However, calls for central banks to take action against asset (especially property) price bubbles may be misguided. Such intervention would need to be very highly precise as not all asset bubbles threaten financial stability, and even so might be too blunt an instrument, or too inefficient. It is very difficult to spot bubbles at an early stage, save through the use of arbitrary rules of thumb prone to costly misidentification errors. Even when this is possible, monetary policy will affect all asset prices, including those that are not synchronised. Moreover, the magnitude and timing of interventions are likely to be unsustainable in the face of slowing or falling output. The authors point instead to a second type of intervention. Macro-prudential regulation aims to prevent feedback loops between asset price bubbles and credit supply. This relies on making capital adequacy requirements counterc
