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Moving Targets

Should central banks respond to movements in equity, housing and foreign exchange markets? This report, published jointly with the International Centre for Monetary and Banking Studies in Geneva, argues that they should.

James Morgan, talks to Stephen G Cechetti, Hans Genberg, John Lipksy and Sushil Wadhwani, the four authors of "Asset Prices and Central Bank Policy", The Geneva Report on the World Economy 2. Some of the issues they discussed:

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Questions and Answers

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1. You say Central Banks can improve macroeconomic performance by reacting systematically to asset prices ... But isn't it the case that by introducing asset prices, the Central Bankers might merely have one more factor that they could get wrong? [James Morgan]
... the conventional wisdom really wasn't well supported by the academic studies ... we have suggested in our work that there is room for improvement ... [Hans Genberg and 
John Lipsky]

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2. Take the UK ... sterling is an asset at bubble levels. Now housing prices also have been rising very strongly ... if the state of sterling demands lower interest rates and the state of the housing market demands higher interest rates. How do you balance that? [James Morgan]
... to take a less controversial example ... in Japan in the late 80s ... the degree of misalignment in the land and stock markets was so much greater than ... the stock markets ... it was clear that the Central Bank should have paid more attention to land and stock prices  ... [Sushil Wadhwani]

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3. You talked about mis-alignment there, and yet that's a difficult beast to identify, are you sure you can see it when it does emerge [James Morgan]
... there are ways to find approximately fair values of currencies and equities...when there are very large - by the usual measures - differences, that's when one ought to adjust monetary policy [Hans Genberg]

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4. Alan Greenspan talked about the irrational exuberance of the stock market in late 1996, [but] he didn't actually do anything about it at the time ... You would have recommended that he should have done something [James Morgan]
... not necessarily ... this is a somewhat interesting part of the financial folklore ... it is surmised somehow that Alan Greenspan said that in fact at that time investors were being irrationally exuberant ... in fact he said no such thing ... he asked hypothetical question ... [John Lipsky]

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5. You talk about monetary policy as a means of dealing with asset price inflation, but aren't there areas here, where other kinds of things might work? Margin calls for example [James Morgan]
... margin requirements .... have become dramatically less important relative to the market as a whole ... back in the 1920s ... margin debt represented 15-20% of the total valuation of the stock market ... today that figure in the US is 1.5% [Stephen G Cechetti]

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6. Tax changes could be used couldn't they, in order to curb asset bubbles and mis-alignments? [James Morgan]
... I would argue against such use of fiscal policy ... [Hans Genberg]

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7. But some people would say that it's better to target the real problem rather than have a general monetary policy approach which is having to deal with all kinds of problems that arise simultaneously [James Morgan]
... if our recommended policy framework were in place, then it would deter the emergence of bubbles ... it would make the economy more stable [Hans Genberg]

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8. OK, supposing the kinds of approach that you have advocated had been in place in the past, can you give an example of a crisis which ... at least would have been considerably alleviated had your approach been adopted? [James Morgan]
... would point to Japan in the late 80s ... had the BOJ used a framework of this kind ... rather than cutting interest rates they would have actually raised interest rates ... stock and land prices wouldn't have got to such crazy levels. [Sushil Wadhwani, 
John Lipsky and 
Hans Genberg]

Asset Prices and Central Bank Policy. Geneva Reports on the World Economy 2 - Report Details

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Should central banks respond to movements in equity, housing and foreign exchange markets? A new Report, published jointly with the International Centre for Monetary and Banking Studies in Geneva, argues that they should - Read more in "European Economic Perspectives"
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