Are asset prices, which are fueled by higher profits and productivity, climbing too far too fast? Do they signal the approach of an unsustainable boom that the Federal Open Market Committee should stop? Bubbles are hard to spot beforehand, and even if the Are asset prices, which are fueled by...
This paper explains the methodology of aggregate asset price indices for over a dozen industrial countries and the changes in that methodology as well the extended country coverage. It is based on a paper exploring aggregate asset price fluctuations across different countries. This note explains the original methodology used to...
Real estate prices are among the fundamental indicators for the development of asset prices. The growing importance of asset prices for central banks' monetary policy is the consequence of the ongoing liberalization of the economic environment and the ensuing globalization of the world economy. The question of asset prices in...
This paper proposes a model of how agents adjust their asset holdings in response to losses in general equilibrium. By emphasizing the relation between deflation and financial distress, the paper captures some original features of the early debt-deflation literature, such as distress selling, instability, and endogenous monetary contraction. What keeps...
The globalization hazard hypothesis maintains that the current account reversals and asset price collapses observed during 'Sudden Stops' are caused by global capital market frictions. A policy implication of this view is that Sudden Stops can be prevented by offering global investors price guarantees on emerging markets assets. These guarantees,...
The paper presents a framework for analyzing the degree of financial transmission between money, bond and equity markets and exchange rates within and between the United States and the euro area. It finds that asset prices react strongest to other domestic asset price shocks, and that there are also substantial...
This paper attempts to conceptualize the debate regarding the role of asset prices and perceived financial imbalances in the formation of monetary policy from the perspective of theoretically optimal policy responses. While much of the disagreement can be reconciled within the framework of flexible inflation targeting, defined as a commitment...
This paper shows that the quantitative predictions of an equilibrium asset pricing model with financial frictions are consistent with the large consumption and current-account reversals and asset-price collapses observed in the "Sudden Stops" of emerging markets crises. Margin requirements set a collateral constraint on foreign borrowing by domestic agents. Foreign...
When equity prices are determined as the discounted sum of current and expected future dividends, Shiller (1981) and LeRoy and Porter (1981) derived a relationship between the variance of the price of equities, pt, and the variance of the ex post realized discounted sum of current and future dividends: p*t:...
This paper links banking with asset prices in a monetary macroeconomic model. The main innovation is to consider how falling asset prices affect the banking system through wide-spread borrower default, while deriving explicit solutions and balance sheet effects even far from the steady state. The paper finds that the effect...
This paper examines the pattern of price depreciation in Japanese land values subsequent to the 1990 stock market crash. The Japanese case is of particular interest because of the size of the shock experienced by real estate markets. As the paper shows below, all Japanese land values fell substantially subsequent...
This paper discusses the computation of capital services measures with user cost expressions that employ exogenous rates of return, as well as expected depreciation and expected asset price changes. One consequence of this formulation is that total capital remuneration does not necessarily equal non-labour income as given by the national...
This paper proposes a framework for co-movements of asset prices with seemingly unrelated fundamentals, as an outcome of optimal portfolio strategies by fund managers. In emerging markets, dedicated managers outperforming a benchmark index and global managers maximizing absolute returns lead to systematic interactions between asset prices, without asymmetric information. The...
This paper characterizes the real-time responses of U.S., German and British stock, bond and foreign exchange markets to regularly-scheduled U.S. macroeconomic news announcements. It is found that announcement surprises produce conditional mean jumps; hence high-frequency stock, bond and exchange rate dynamics are linked to fundamentals. This contrasts with many previous...
The paper first discusses what economists mean by asset price bubbles before putting forward a stylized macroeconomic model in which a monetary authority can influence the behavior, in only an indirect way, of the path of asset prices. The baseline model suggests that central banks should systematically respond to asset...
Some participants believed that the prolonged period of policy accommodation had generated a significant degree of liquidity that might be contributing to signs of potentially excessive risk-taking in financial markets. --FOMC Minutes, December 14 Some participants believed that the prolonged period of policy...
This paper studies fiscal policy during boom-bust phases in asset prices and draws several conclusions. First, expansions and contractions in economic activity during such boom-bust phases tend to be highly persistent, cyclical turning points are harder to forecast, and the margins of error for output gap estimates can be large....
This paper examines if the diversification decisions of individual investors influence asset prices. First the paper shows that a vast majority of individual investors in our sample are under-diversified and the unexpectedly high idiosyncratic risk in their portfolios results in a welfare loss - the least diversified group of investors...
This paper analyzes the effect of non-constant elasticity of the pricing kernel on asset return characteristics. It is shown that declining elasticity of the pricing kernel can lead to predictability of asset returns and high and persistent volatility. Also, declining elasticity helps to explain the use of technical analysis and...
The debate about the dynamics and potential policy responses to asset inflation has intensified in recent years. This paper argues that the uncertainties involved in understanding financial market developments and their potential impact on the real economy are likely to remain too high to embolden policy makers. The political and...
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