The role of asset prices in the formulation of monetary policy

BIS Conference Papers
March 1998

Since the early 1980s, the behaviour of asset prices has posed a continuing concern to central banks in their formation of monetary policy as well as a challenge to researchers attempting to explain and interpret the behaviour of asset prices. For instance, the world-wide collapse in equity prices in 1987, the property price cycles in several industrial countries during the second half of the 1980s and the sharp decline in bond prices in 1994 were all to a large extent unexpected and may have established a new asset price environment. 

These concerns and challenges were also present last year. While inflation in most industrial countries either declined or remained stable within a 1-3% range, both bond and equity markets recorded substantial gains and exchange rates also moved quite strongly in several countries with floating exchange rates.

This combination of low and stable goods and service price inflation and pronounced movements in asset prices raises the issue of whether, and if so how, monetary policy should react. This is a complex issue, in particular in the current environment where asset price changes in most countries have been confined to financial assets while property prices have been largely stable. To further explore this and related issues, the topic of the Central Bank Economists' Meeting held at the BIS on 28th and 29th October, 1997 was chosen to be: "The role of asset prices in the formulation of monetary policy". 

The 15 papers submitted by the participating central banks were presented and discussed in four sessions, covering the information content of asset prices, the determinants of asset prices, the role of asset prices in the transmission mechanism and asset prices and monetary policy.