This report argues that monetary policy and central banks should not aim to actively manage asset price cycles.
‘Central bankers are now questioning the established consensus on the relationship between monetary policy and asset prices and risk forgetting the lessons from the past. This shift in sentiment toward a more activist role for monetary policy in relation to asset prices is taking place both here in Australia at the RBA, as well as central banks overseas,’ says the report.
Kirchner also argues that ‘a “bubble” is not a meaningful way to characterise asset price cycles.’ While there is little agreement among economists about what constitutes a ‘bubble,’ the concept has a strong hold on the popular imagination. Some of the most well-known historical ‘bubble’ episodes, such as the Dutch ‘tulipmania’ of the 1630s, are myths that have been debunked by modern scholarship.
‘Historical attempts to prick asset price ‘bubbles’ have often ended in disaster.’
The report reviews two recent ‘bubble’ episodes: the turn of the century boom and bust in technology stocks; and the more recent US housing cycle, both of which have been blamed on US monetary policy. But Kirchner argues that the role of monetary policy in these episodes is less important than is widely assumed.