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CNB > Economic research > Research publications > CNB Working paper series > 2005 > The Brave New World of Central Banking: The Policy Challenges Posed by Asset Price Booms and Busts

The Brave New World of Central Banking: The Policy Challenges Posed by Asset Price Booms and Busts

Stephen G. Cecchetti

At the dawn of the 21st century, property and equity ownership are spread more broadly across the population than they once were. One consequence of this is that asset price booms and crashes now have a direct impact on general welfare. The fact that bubbles distort nearly all economic decisions gives policymakers a stronger interest in asset price stability. In this essay I examine the theoretical and empirical case for the existence of equity and property bubbles, and then summarize the economic distortions that they create. The evidence suggests increasing our attention on property prices. I go on to discuss the possible policy responses, including examining the consequences of changing the way in which housing is included in standard aggregate price measures.

Keywords: Central bank policy, equity price bubbles, housing price bubbles.

Issued: December 2005

Published as: The Brave New World of Central Banking: Policy Challenges Posed by Asset Price Booms and Busts, National Institute Economic Review, 196(1), pp. 107-119

Download  CNB WP No. 14/2005 (pdf, 351 kB)