Abstract
The current crisis gives occasion to revisit an old question: should monetary policy be used to prevent asset price busts? The question has at least three aspects, each of which is addressed in this chapter. First, we examine the historical evidence in search of consistent macroeconomic patterns that could be used as reliable leading indicators of asset price busts. Second, we examine the role of monetary policy in the buildup to the current crisis. In particular, we assess the validity of accusations that policymakers created the current crisis by reacting insufficiently to growing inflation pressure or that they raised the likelihood of an asset price bust by placing insufficient weight on credit and asset prices when setting interest rates. Third, we consider whether the goal of monetary policy should be expanded beyond just the stability of goods price inflation, how this could be done, and the potential tradeoffs involved.
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