Understanding Asset Prices: An Overview

Abstract

This paper reviews analytical work carried out by central banks that participated at the Autumn Meeting of Central Bank Economists on "Understanding asset prices: determinants and policy implications", which the BIS hosted on 30-31 October 2006. The paper first discusses some general properties of asset prices, focusing on volatilities and comovements. It then reviews studies that look at determinants of asset prices and that attempt to estimate a fair value of assets. The next part of the paper focuses on research that aims at measuring the impact of changes in asset wealth on the real economy. It then goes on to discuss how central banks use information from asset prices to develop indicators of market expectations that are useful for monetary policy purposes. Finally, the paper reviews central banks' views on whether monetary policy should react in a direct way to asset price developments.

On Market‐Friendly Central Bankers*

“…It also echoes Stein and Sunderam (2018) 18 Such policy considerations are more than just theoretical curiosities. In many countries (e.g., Australia, Canada, New Zealand and the UK), policy-makers have expressed concern about misaligned house prices and are actively examining measures to deal with the deviations of house prices from their fundamental values (H ördahl & Packer, 2007). beauty contest considerations rather than a commitment problem on the part of the central bank.…”

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