Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/27480
Authors: 
Ahrend, Rudiger
Year of Publication: 
2008
Series/Report no.: 
Economics Discussion Papers / Institut für Weltwirtschaft 2008-44
Abstract: 
This paper addresses the question of whether and how easy monetary policy may lead to excesses in financial and real asset markets and ultimately result in financial dislocation. It presents evidence suggesting that periods when short-term interest rates have been persistently and significantly below what Taylor rules would prescribe are correlated with increases in asset prices, especially as regards housing, though no systematic effects are identified on equity markets. Significant asset price increases, however, can also occur when interest rates are in line with Taylor rules, associated with periods of financial deregulation and/or innovation. The paper argues that accommodating monetary policy over the period 2002-2005, in combination with rapid financial market innovation, would seem in retrospect to have been among the factors behind the run-up in asset prices and financial imbalances -- the (partial) unwinding of which helped trigger the 2007/08 financial market turmoil.
Subjects: 
Interest rates
monetary policy
housing
sub-prime crisis
financial markets
macro-prudential
regulation Taylor rule
house prices
JEL: 
E5
G15
F3
E44
Creative Commons License: 
http://creativecommons.org/licenses/by-nc/2.0/de/deed.en
Document Type: 
Working Paper

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