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Policymakers disagree over whether central banks should use interest rates to curb leverage and asset price booms. Higher interest rates make mortgages more expensive and could prevent borrowers from bidding up house prices to create a boom. However, rough calculations show that the size of rate increase needed to do so might also boost unemployment and push down inflation. Thus, using this type of policy tool may cause the central bank to deviate significantly from its goals of full employment and price stability., Wild swings in asset prices over the past 20 years and the associated boom-bust cycles have sparked considerable debate about how monetary policy might play a stabilizing role (see, for [...]

The Federal Reserve was created 100 years ago in response to the harsh recession associated with the Panic of 1907. Comparing that recession with the Great Recession of 2007-09 suggests the Fed can mitigate downturns to some extent. A statistical analysis suggests that if a central bank had lowered interest rates during the 1907 panic the same way the Fed did during the 2008 financial crisis, gross domestic product would have contracted two percentage points less than it actually did., This year marks the 100th anniversary of the Federal Reserve System. Two of the Fed's main duties are acting as lender of last resort in times of crisis, and promoting [...]

The collapse of an asset price bubble usually creates a great deal of economic disruption. But bubbles are hard to anticipate and costly to deflate. As a result, policymakers struggle to determine how they should respond, if at all. Evaluating the economic costs of past equity and real estate bubbles--with particular attention to how much credit grew during boom phases--can provide valuable insights for this debate. A recent study finds that equity bubbles are relatively benign. More danger comes from housing bubbles in which credit grows rapidly., Asset price booms pose a challenge for monetary policy. It is difficult to separate optimism justified by future prospects about underlying fundamentals from optimism fueled by speculation about future prices [...]

The European Central Bank (ECB) and the Federal Reserve share a similar goal, price stability, and their strategies to pursue their goals are similar--with one notable difference. When considering long-term [...]

There is a well-worn story that illustrates how economists view financial markets (and, perhaps, the rest of the world). An economist and a non-economist are walking down the street. The [...]