Asset Price Bubbles
The Implications for Monetary, Regulatory, and International Policies
Edited by William Curt Hunter, George G. Kaufman and Michael Pomerleano
In both the industrialized and developing worlds, a distinctive feature of the last two
decades has been prolonged buildups and sharp collapses in asset markets such as stock,
housing, and exchange markets. The volatility has sparked intense debate in academic and
policy circles over the appropriate monetary and regulatory response to dramatic market
shifts.
This book examines asset price bubbles to further our understanding of the causes and
implications of financial instability, focusing on the potential of central banks and
regulatory agencies to prevent it. The book grew out of a conference jointly sponsored by
the Federal Reserve Bank of Chicago and the World Bank Group in April 2002.
William Curt Hunter is Dean of the School of Business at the University of Connecticut and
former Senior Vice President and Director of Research at the Federal Reserve Bank of
Chicago.
George G. Kaufman is John F. Smith, Jr. Professor of Economics and Finance at Loyola
University in Chicago and a consultant at the Federal Reserve Bank of Chicago.
Michael Pomerleano is Lead Financial Specialist in the Financial Sector Development
Department of the World Bank Group.
Endorsements
"How should policymakers react to asset price movements that cannot be explained by
standard models? To answer this question, it is not enough to identify a bubble and
understand its origins. One needs also to predict the impact of monetary policy on an
event that is by its nature difficult to explain. While comprehensive answers are scarce,
this wonderful and comprehensive collection of readings marks an important step forward,
and will provide plenty of food for thought and debate."
--Richard Brealey, London Business School
"It is dangerous to develop pricing theories without a knowledge of the history of
asset prices and the role of institutions and policymakers in affecting them. This timely
volume presents competing perspectives on the existence and consequences of bubbles in
asset markets, and asks what, if anything, should be done about them. It will be of
interest to financial economists as well as macroeconomists and policymakers."
--Michael Brennan, Professor Emeritus, University of California, Los Angeles
Acknowledgments ix
Preface xi
Overview xiii
I Keynote Addresses
1 Asset Price Bubbles, Information, and Public Policy
Randall S. Kroszner
Sample Chapter - Download PDF (69 KB) 3
2 Asset Price Bubbles and Their Implications for Monetary Policy and
Financial Stability
Jean-Claude Trichet 15
3 Rational and Nonrational Bubbles
Allan H. Meltzer 23
4 Diverse Views on Asset Bubbles
Robert J. Shiller 35
5 Asset Prices and Monetary Policy
Michael Mussa 41
II Recent Experience with Asset Price Bubbles
6 US Stock Market Crashes and Their Aftermath: Implications for
Monetary Policy
Frederic S. Mishkin and Eugene N. White 53
7 Japan's Experience with Asset Price Bubbles: Is It a Case for
Inflation Targeting?
Kunio Okina and Shigenori Shiratsuka 81
8 Lending Booms, Real Estate Bubbles, and the Asian Crisis
Charles Collyns and Abdelhak Senhadji 101
9 Tropical Bubbles: Asset Prices in Latin America, 1980-2001
Santiago Herrera and Guillermo E. Perry 127
10 Different Countries, Similar Experience
Takeo Hoshi 163
11 Comments on Recent Experience with Asset Price Bubbles
Ignazio Visco 165
III Theory and History of Asset Price Bubbles
12 Stocks as Money: Convenience Yield and the Tech-Stock Bubble
John H. Cochrane 175
13 Bubble Psychology
Werner De Bondt 205
14 Bubbles in Real Estate Markets
Richard Herring and Susan Wachter 217
15 Comments on "Stocks as Money..." and "Bubble
Psychology"
Robert S. Chirinko 231
16 Comments on Theory and History of Asset Price Bubbles
Bertrand Renaud 239
IV Empirical Dimensions of Asset Price Bubbles
17 Imbalances or "Bubbles?" Implications for Monetary and
Financial Stability
Claudio Borio and Philip Lowe 247
18 Testing for Stock Market Overvaluation/Undervaluation
Ellen R. McGrattan and Edward C. Prescott 271
19 A Stochastic Index of the Cost of Life: An Application to Recent and
Historical Asset Price Fluctuations
Michael F. Bryan, Stephen G. Cecchetti and Roisin O'Sullivan 277
20 Comments on Empirical Dimensions of Asset Price Bubbles
Andrew J. Filardo 291
21 Bubbles, Inflation, and the Big One: Comments on "A Stochastic
Index of the Cost of Life..." and "Testing for Stock Market
Overvaluation/Undervaluation"
Bruce Lehmann 299
V International Transmission of Financial Shocks
22 Globalization and Changing Patterns in Crisis Transmission
Michael D. Bordo and Antu Panini Murshid 309
23 Asset Price Bubbles and Stock Market Interlinkages
Franklin Allen and Douglas Gale 323
24 Banking Policy and Macroeconomic Stability: An Exploration
Gerard Caprio, Jr. and Patrick Honohan 337
25 A Global Perspective on Extreme Currency Linkages
Philipp Hartmann, Stefan Straetmans and Casper de Vries 361
26 Comments: Shifting the Risk after Shifting the Focus
Anna J. Schwartz 383
VI Technology, the New Economy, and Asset Price Bubbles
27 Valuation and New Economy Firms
Steven N. Kaplan 391
28 Home Bias, Transactions Costs, and Prospects for the Euro
Catherine L. Mann and Ellen E. Meade 403
29 Comments on "Valuation and New Economy Firms"
Lawrence Slifman 419
VII Implications of Bubbles for Monetary Policy
30 Asset Prices in a Flexible Inflation Targeting Framework
Stephen G. Cecchetti, Hans Genberg and Sushil Wadhwani 427
31 Interest Rate Policy Should Not React Directly to Asset Prices
Marvin Goodfriend 445
32 Comments on Implications of Bubbles for Monetary Policy
Benjamin M. Friedman 459
VIII Implications of Bubbles for Prudential Regulatory Policy
33 The Historical Pattern of Economic Cycles and Their
Interaction with Asset Prices and Financial Regulation
Charles A. E. Goodhart 467
34 Asset Price Bubbles and Prudential Regulation
Jeffrey Carmichael and Neil Esho 481
35 The Morning After: Restructuring in the Aftermath of an Asset Bubble
Michael Pomerleano 503
36 Comments on "The Historical Pattern of Economic Cycles and Their
Interaction with Asset Prices and Financial Regulation"
Joaquim Levy 517
37 Comments on "Asset Price Bubbles and Prudential Regulation"
Ramon Moreno 523
38 Comments on "The Morning After..."
Eric S. Rosengren 529
IX Looking Forward: Plans for Action to Protect against
Bubbles
39 Banking Provisions and Asset Price Bubbles
Jaime Caruana 537
40 Looking Forward on Monetary and Supervision Policies to Protect
against Bubbles
Takatoshi Ito 547
41 Planning to Protect against Asset Bubbles
Vincent R. Reinhart 553
Conference Program 561
Index
607 pp., 86 illus. Paperback
