Bordo, Michael D. <br/><br/>
Boom-Busts in Asset Prices, Economic Instability, and Monetary Policy / 
Michael D. Bordo, Olivier Jeanne. 
 - Cambridge, Mass.  National Bureau of Economic Research  2002. 
 - 1 online resource:  illustrations (black and white); 
 - NBER working paper series  no. w8966 .
 - Working Paper Series (National Bureau of Economic Research)  no. w8966. .
<br/><br/> May 2002. 
<br/><br/> 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. 
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