Frait, Jan and Komárek, Luboš (2006) Monetary policy and asset prices: what role for central banks in new EU member states? Working Paper. University of Warwick, Department of Economics, Coventry.

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Abstract

The paper deals with the relationship between monetary policy and asset prices. Besides surveying the general discussion, it attempts to extend it to recent developments in the new Member States of the EU (NMS), namely the Czech Republic, Hungary, Poland and Slovakia (the EU4). After a brief description of the current macroeconomic situation in the NMS, the appropriate reaction of monetary policy to asset price bubbles is dealt with and the main pros and cons associated with this reaction are summarised. Afterwards, the risks of asset market bubbles in the EU4 countries are evaluated. Since the capital markets are still underdeveloped and the real estate price boom seems to be a natural reaction to the initial undervaluation, the risks are viewed as rather small. The conclusion is thus that it is crucial for central banks in mature economies as well as in the NMS to conduct their monetary policies as well as their supervisory and regulatory roles in a way that does not promote the build-up of asset market bubbles. In exceptional times, central banks of small open economies must be ready to use monetary policy steps as a kind of insurance against the adverse effects of potential asset market bubbles.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HG Finance
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	Banks and banking, Central -- European Union countries, Monetary policy -- European Union countries, Assets (Accounting), Asset-backed financing, European Union countries -- Economic conditions
Series Name:	Warwick economic research papers
Publisher:	University of Warwick, Department of Economics
Place of Publication:	Coventry
Date:	2006
Number:	No.738
Number of Pages:	21
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
Funder:	Grantová agentura České republiky [Grant Agency of the Czech Republic] (GACR)
Grant number:	402/05/2758 (GACR)
References:	BERNANKE, B. – GERTLER, M. (1999): Monetary Policy and Asset Price Volatility, Federal Reserve Bank of Kansas City Economic Review, Fourth Quarter, pp. 17–51. BERNANKE, B. – GERTLER, M. (2001): Should Central Banks Respond to Movements in Asset Prices? American Economic Review, Vol. 91, No. 2, May, pp. 253–257. BERNANKE, B. (2002): Asset-Price “Bubbles” and Monetary Policy. Remarks before the New York Chapter of the National Association for Business Economics, New York, October 15, 2002, http://www.federalreserve.gov/boarddocs/speeches/2002/20021015/default.htm BOLLARD, A. (2004): Asset Prices and Monetary Policy. An Address to the Canterbury Employers’ Chamber of Commerce, Christchurch, 30 January 2004; BIS Review, No. 7, 2004, http://www.bis.org/review/r040206f.pdf. CHRISTIANO, L. J. – FITZGERALD, T. J. (2003): The Band Pass Filter. International Economic Review, 44(2), pp. 435–465. FRAIT, J. (2000): Economic Transition in the Czech Republic: A Real Success? In: Kaluyzhnova, Y.-Lynch, D.- Tucker, N.: The Euro-Asian World: A Period of Transition. Macmillan Press (UK) & St. Martin Press USA, 2000, pp. 116–140. HANOUSEK, J. – TŮMA, Z. (2002): A test of the permanent income hypothesis on Czech voucher privatization. Economics of Transition, no. 10, pp. 235-254. HILBERS, P. – OTKER-ROBE, I. – PAZARBASIOGLU, C. – JOHNSEN, G. (2005): Assessing and Managing Rapid Credit Growth and the Role of Supervisory and Prudential Policies. Washington, D.C., International Monetary Fund, Working Paper, No. WP/151/05, July 2005. SREJBER, E. (2004): What Role Do Asset Prices and Credit Play in Monetary Policy? Remarks for Adam Smith Seminar, Thun, Switzerland, 30 June 2004, http://www.bis.org/review/r040713h.pdf.
URI:	http://wrap.warwick.ac.uk/id/eprint/1456

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