Is "benign neglect" the right response to asset price booms?

• Pages: 86-88

Page 86

Over the past two decades, monetary policymakers in many countries have achieved general stability in the prices of goods and services, as measured by consumer price inflation. At the same time, however, stock and property prices have experienced enormous boom-busts. Like the 1920s stock market boom and the 1929 crash, these wide price swings have had serious economic repercussions, including slowdowns in growth and, in some cases, recessions and deflation, most markedly in Japan following the bursting of its asset price bubble of the 1980s. Can monetary authorities manage the consequences of asset market busts more successfully? And what role, if any, should they play in trying to prevent future asset price boom-busts? In a new IMF Working Paper,Michael D. Bordo of Rutgers University and Olivier Jeanne of the IMF's Research Department consider these issues and speak to the IMF Survey about their findings.

IMF SURVEY:What are the main features of recent asset price booms and busts?

BORDO:We looked at asset price boom-busts in 15 OECD countries since 1970 and found a considerably lower incidence of stock market boom-busts than property price booms and busts. Out of 24 boom episodes in stock prices, only 4 were followed by busts: Finland (1989), Italy (1982), Japan (1990), and Spain (1990). Out of 20 booms in property prices, 11 were followed by busts. Thus, the probability of a stock market boom leading to a bust was 17 percent, but the probability of a property price boom leading to a bust was 55 percent.According to our measure, the United States, as a whole, never experienced a boom-bust in property prices. Such boom-busts tend to be more prevalent in small countries where the real estate market is more concentrated in the capital or major cities.We also found that banking crises tended to be associated with asset price boom-busts.

We also looked at the behavior of consumer price inflation, the output gap, and domestic credit during the boom-bust episodes. All three variables declined with, or following, the bust. This, we suggest, provides evidence that asset price boom-busts have significant and deleterious effects on the macroeconomy.

IMF SURVEY: Should central banks be concerned about stock and property price inflation as well as inflation in the price of goods?

JEANNE: This question increasingly preoccupies central bankers-rightly so in our view, after the Japanese experience of the 1990s and the recent slide in stock markets worldwide. Our answer is that, yes, in principle, there might be circumstances in which central banks should respond to asset prices and, more specifically, should restrict monetary policy preemptively in an asset price boom.

The...