Turbulence in Asset Markets:
the Role of Micro Policies
Report of the Contact group¹ on Asset Prices

September 2002

"The point of departure for this study is a very practical policy issue: what can be done in terms of policy measures to reduce the risks of excessive and potentially destabilising asset price movements? The question arises because asset prices constitute a critical link between macroeconomic and financial stability. If asset prices diverge substantially from long-run equilibrium levels, history shows that there is a risk of turbulence or even serious financial distress. This in turn may have adverse effects: on real economic developments via various channels or mechanisms; on financial stability, in particular in the banking system; on household wealth and consumption; and on Tobin.s q, which affects investment.

"In recent years, a vast amount of literature has emerged on the relationship between monetary policy and asset price misalignments. On the other hand, comparatively little has been done to understand the connections between microeconomic policy measures, asset prices and financial or real stability. Against this background, the G10 Deputies decided, in the spring of 2001, to initiate work on this issue. The subject was a topic of lively discussion by the G10 Ministers and Governors at their meeting in April 2001 and they welcomed the effort to understand how structural factors affect asset prices."

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