Macroeconomic Patterns and Monetary Policy in the Run-up to Asset Price Busts
IMF Working Papers, November 1, 2009
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- Macroeconomic Patterns and Monetary Policy in the Run-up to Asset Price Busts
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Bibliographic details
- Authors: Alasdair Scott, Pau Rabanal, Prakash Kannan
- Published: November 1, 2009
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451873993.001
Summary findings
- Inflation, output and the stance of monetary policy do not typically display unusual behavior ahead of asset price busts.
- Credit, shares of investment in GDP, current account deficits, and asset prices typically rise, providing useful, if not perfect, leading indicators of asset price busts.
- These patterns could also be observed in the build-up to the current crisis.
- Monetary policy was not the main, systematic cause of the current crisis.
- With inflation typically under control, central banks effectively accommodated these growing imbalances, raising the risk of damaging busts.
Policy implications and interpretation
- Monitoring indicators beyond inflation, output, and conventional policy stance is important for early detection of asset price booms and bust risk; specifically monitor credit, investment shares in GDP, current account deficits, and asset prices.
- Central banks should be aware that keeping inflation under control does not preclude the build-up of financial imbalances that can lead to damaging busts.
- Monetary policy alone was not identified as the primary systematic driver of the crisis examined, suggesting macroprudential and other tools may be needed to address imbalances.