Abstract

MULLER DURAN, Nancy. Should the FED react to financial bubbles?. Inv. Econ [online]. 2018, vol.77, n.306, pp.44-73. ISSN 0185-1667.  https://doi.org/10.22201/fe.01851667p.2018.306.67932.

The debate between Bernanke-Gertler (2000, 2001) versus Cecchetti et al. (2000, 2002) on whether the Central Bank should react to price asset inflation trends is dealt with in the present paper. It is argued that the US Federal Reserve’s conventional monetary policy rule may well guarantee price stability, but does not necessarily simultaneously lead to financial stability. This signals that asset price dynamics convey some relevant information not captured by the Fed’s rule. Contrary to the conclusions reached by both positions in the aforementioned debate, the paper’s econometric results suggest that, while financial assets inflation is not innocuous, its eventual incorporation in the monetary policy rule would trigger an excessive adjustment of the (interest rate) policy instrument and, thereby, a potential macroeconomic instability.

Keywords : Financial assets; monetary policy; autoregressive-distributed lag.

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