Can Monetary Policy Help to Prevent the Emergence of Asset Price Bubbles? Answers from Panel-Vectorautoregressions

This paper estimates the interdependencies between monetary policy (money supply and interest rates), asset (house and share) prices, consumer prices and GDP, using a vector error correction model for a panel of 18 OECD countries with quarterly data over the period 1980 to 2009. Our results suggest that monetary policy, which aims at stabilizing share and house prices, might have strong repercussions on GDP, in particular through the interest rate channel. Since asset markets are - at least in the short run - guided by economic fundamentals only to a limited extent, monetary policy should thus not be too focused on asset prices. This does not imply that excessive price movements in asset markets should be ignored but rather that instruments other than traditional monetary policy such as tighter banking and credit regulations, along with a rigorous enforcement, are more suitable to stabilize asset markets.