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The illusion of stability-low inflation in a bubble economy

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Miller, Marcus, Mohanty, Ishita and Zhang, Lei (2009) The illusion of stability-low inflation in a bubble economy. Manchester School, Vol.77 (Suppl. 1). pp. 126-149. doi:10.1111/j.1467-9957.2009.02122.x

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Official URL: http://dx.doi.org/10.1111/j.1467-9957.2009.02122.x

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Abstract

Econometric studies show that changes in real house prices are strongly autocorrelated in the UK, giving rise to prolonged departures from equilibrium. What happens when arbitrage is 'broken' and house prices no longer reflect future fundamentals? Adding a bubble to capture the disequilibrium behaviour picked up by econometricians, we show that a narrow focus on consumer price inflation-while neglecting house price disequilibrium-may for some time create the appearance of stability. But, with the bubble distorting policy and the economy on the way up and wreaking havoc on the banking system when it bursts, this is an illusion. For a bubble economy, new instruments of policy (such dynamic capital requirements and loan-to-value limits) are clearly needed-together with clear mandates as to who regulates what.

Item Type: Journal Article
Subjects: H Social Sciences > HC Economic History and Conditions
Divisions: Faculty of Social Sciences > Economics
Journal or Publication Title: Manchester School
Publisher: Wiley-Blackwell Publishing, Inc.
ISSN: 1463-6786
Official Date: 2009
Dates:
DateEvent
2009Published
Volume: Vol.77
Number: Suppl. 1
Number of Pages: 24
Page Range: pp. 126-149
DOI: 10.1111/j.1467-9957.2009.02122.x
Status: Peer Reviewed
Publication Status: Published
Access rights to Published version: Restricted or Subscription Access

Data sourced from Thomson Reuters' Web of Knowledge

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