There may be circumstances when the assessment of the potential impact of asset price dynamics on price stability may imply that monetary policy should try to 'lean against the wind' in order to mitigate medium to longer-term risks, Papademos said.
The recent episode has shown how and why fundamentally unjustified asset price booms or excesses can occur and persist for some time, Lucas Papademos, ECB Vice-President said. Some lessens should be relearned, he continued, including the role of excessive credit expansion and high leverage in driving the rising phase of a boom-and-bust asset price cycle and accounting for the steepness of the fall during the downturn phase.
On the role of monetary policy to prevent asset price bubbles, Papademos said that there may be circumstances when “monetary policy should try to ‘lean against the wind’ in order to mitigate medium to longer-term risks to price stability and the economy.
“Addressing the broader issue of how to minimise the risk of financial bubbles occurring requires the involvement of the private sector itself, financial market regulators and supervisors of financial institutions”, he said. “Monetary policy could, under certain circumstances, play a role in containing this risk, but it is certainly not the main instrument to help deal with the emergence, persistence or unwinding of financial imbalances.”
Coming to financial stability risks indicators as currently investigated by several international institutions, Papademos underlined that all these indicators that are currently being developed are subject to important inherent limitations.
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