Should the Fed Pop Bubbles?
October 18, 2008 – 5:58 pm by BHThis has been an ongoing debate, and is obviously relevant following the boom-bust in the Nasdaq and now the housing markets. Here’s Ben Bernanke and Mark Gertler, an economist at NYU, from a few years back:
In recent decades, asset booms and busts have been important factors in macroeconomic fluctuations in both industrial and developing countries. In light of this experience, how, if at all, should central bankers respond to asset price volatility?
We have addressed this issue in previous work (Ben Bernanke and Mark Gertler, 1999). The context of our earlier study was the relatively new, but increasingly popular, monetary policy framework known as inflation targeting (see, e.g., Bernanke and Frederic Mishkin, 1997). In an inflation-targeting framework, publicly announced medium-term inflation targets provide a nominal anchor for monetary policy, while allowing the central bank some flexibility to help stabilize the real economy in the short run. The inflation-targeting approach gives a specific answer to the question of how central bankers should respond to asset prices: Changes in asset prices should affect monetary policy only to the extent that they affect the central bank’s forecast of inflation. To a first approximation, once the predictive content of asset prices for inflation has been accounted for, there should be no additional response of monetary policy to asset-price fluctuations.
This view has been SOP for many years. Now it appears that is starting to change (WSJ).
