Asset-oriented central bank policy

Determination of monetary policy solely or predominantly on the price level of assets, especially real estate in addition to securities. – But even the determination of “appropriate” asset prices poses hardly solvable judgment problems. After all, even a central bank cannot judge a “correct” price level and “healthy” earnings expectations because it lacks the yardsticks to do so. – The level of asset prices must be allowed to fluctuate in order to reflect changing assessments of future returns. Freely fluctuating asset prices are a prerequisite for financial markets to effectively perform their economic capital-diverting function: namely, to direct investment-seeking capital to where the most effective allocation of scarce resources can be ensured, to the “best host,” the best economist. – Moreover, the stabilization of the asset price level would have to take place on both sides of corresponding deviations. Price losses would have to be absorbed by interest rate cuts. When asset prices rise, however, interest rate hikes would be called for. – See stock bubble, alignment of stock price-determined, building land assets, building savings contract, oversaved, bubble, speculative, first-rate default clause, monetary policy without money, Greenspan doctrine, real estate bubble, real estate assets, Martin principle, mortgage equity withdrawal, low interest rate policy, savings rate, interest rate, kept low, two-pillar principle. – Cf. ECB Monthly Bulletin of January 2009, pp. 63 ff. (link between real estate wealth and consumer spending in the euro area; detailed presentation, many overviews), ECB Monthly Bulletin of September 2013, pp. 61 ff. (on the influence of monetary policy on asset prices; overviews).

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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
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