Monetary Policy and Asset Price Volatility

Abstract: During the past 20 years, the world?s major central banks have been largely successful at bringing inflation under control. Although it is premature to suggest that inflation is no longer an issue of great concern, it is quite conceivable that the next battles facing central bankers will lie on a different front. One development that has already concentrated the minds of policymakers is an apparent increase in financial instability, of which one important dimension is increased volatility of asset prices. Borio, Kennedy, and Prowse (1994), among others, document the emergence of major boom-bust cycles in the prices of equity and real estate in a number of industrialized countries during the 1980s. Notable examples include the United States,
Japan, the United Kingdom, the Netherlands, Sweden, and Finland.

Authors: Ben Bernanke and Mark Gertler

18 Bernanke & Gertler 1999.pdf