Working Paper: NBER ID: w12542
Authors: Stephen G. Cecchetti
Abstract: Modern central bankers are the risk managers of the financial system. They take actions based not only on point forecasts for growth and inflation, but based on the entire distribution of possible macroeconomic outcomes. In numerous instances monetary policymakers have acted in ways designed to avert disasters. What are the implications of this approach for managin the risks posed by asset price booms? To address this question, I study data from a cross-section of countries to examine the impact of equity and property booms on the entire distribution of deviation in output and price-level from their trends. The results suggest that housing booms worsen growth prospects, creating outsized risks of very bad outcomes. By contrast, equity booms have very little impact on the expected mean and variance of macroeconomic performance, but worsen the worst outcomes.
Keywords: Asset Price Booms; Macroeconomic Risks; Risk Management; Monetary Policy
JEL Codes: E50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| housing booms (R31) | growth prospects (E66) |
| housing booms (R31) | likelihood of severe negative outcomes for GDP (F69) |
| housing booms (R31) | output gap (E23) |
| housing booms (R31) | volatility of growth (O44) |
| equity booms (G12) | worst-case scenarios for price levels (E30) |
| housing booms (R31) | expected tail loss (C51) |
| asset price booms (E32) | expected tail loss (C51) |
| asset price booms (E32) | adverse outcomes (I12) |