Asset Price Bubbles and Central Bank Policies: The Crash of the "Jackson Hole Consensus"

This chapter examines whether or not monetary policy should respond to asset price bubbles. More specifically, it asks how central banks respond while an asset bubble is growing and how they respond after the bubble bursts. It begins with a general overview of asset bubbles that supports the existence of the real and financial sectors of an economy before discussing how the bursting of asset price bubbles may cause financial instability that often adversely affects the real sector of an economy. It then describes the normative vs. positive responses of a central bank to asset price bubbles, along with the concept of macroprudential regulation as an approach for leaning against asset bubbles. It argues that the high costs associated with the 2007–2009 financial crisis undermined the so-called Jackson Hole Consensus and that the new central bank policy paradigm appears to have shifted toward “leaning against bubbles”.