We explore the implications of asset price volatility for the management of monetary policy. We show that it is desirable for central banks to focus on underlying inflationary pressures. Asset prices become relevant only to the extent they may signal potential inflationary or deflationary...

We develop a model of banking crises which Is consistent with two important features of the data: First, banking crises are usually preceded by credit booms. Second, credit booms often do not result in a crisis. That is, there are "good" booms as well as "bad" booms in the language of Gorton and...

This paper incorporates a bubble term in the standard FTPL equation to explain why countries with persistently negative primary surpluses can have a positively valued currency and low inflation. It also provides an example with closed-form solutions in which idiosyncratic risk on capital returns...

Employing the neutral Kindleberger definition of a bubble as "an upward price movement over an extended range that then implodes", this paper explores the causes of the "Japanese Bubble" of 1985 to 1990 without precluding the possibility that the bubble was due to perceptions of fundamentals....

Modern central bankers are the risk managers of the financial system. They take actions based not only on point forecasts for growth and inflation, but based on the entire distribution of possible macroeconomic outcomes. In numerous instances monetary policymakers have acted in ways designed to...

This paper examines the economic environments in which past U.S. stock market booms occurred as a first step toward understanding how asset price booms come about and whether monetary policy should be used to defuse booms. We identify several episodes of sustained rapid rise in equity prices in...

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...