Central Bank Talk: Killing softly the housing bubble with its words?

Last year witnessed a strong concern from central banks with asset prices, with the sub-prime crisis effects still looming over the monetary and financial markets. There is now an extensive literature about the optimal response of central banks to the behaviour of asset prices but we think that rather than debating whether monetary policy should respond to asset prices, a fruitful area of research should consider other tools, besides the central bank’s short term interest rate, to prevent bubbles and their consequences. With the rising importance of transparency in monetary policy making, central banks started increasingly focusing on communication as a key tool to improve the effectiveness of monetary policy. This paper analyses communication emanating from the ECB since the creation of EMU, trying to assess whether communication showed any concern with asset prices behaviour, in particular the housing market. We conclude that in the last years the ECB behaviour was characterised by a riding of the house price wave, with its communication showing a strong concern with house prices which motivated the monetary policy tightening period that we are now abandoning. We think that with the latest data showing slower increases in house prices, “soft words” about it will start to diminish and be accompanied by the end of interest rate increases.