Asset Price Inflation Research Articles

Beyond Stop/go?: Explaining Australia's Long Boom

The pattern of boom and bust that characterised the Australian economy from the early 1970s to the early 1990s currently seems to be a thing of the past as Australia enters its sixteenth year of uninterrupted expansion. The expansion has lasted twice as long as those of the 1970s and 1980s, which raises the question--why has it happened? One way of approaching this question is to identify the factors that previously precipitated major slumps or recessions. The major recessions of the mid 1970s, the early 1980s and the early 1990s, were induced by monetary policy and a determination by the Treasury and Reserve Bank to slow an overheated economy. The first two policy-induced recessions were aimed primarily at fighting inflation. The recession of the early 1990s was a product of policy attempts to slow the economy in the face of a perceived current account crisis and domestic financial overheating, particularly the credit-fuelled asset price inflation of the late 1980s. The expansion that began in the early 1990s has also been characterised by large current account deficits and strong asset price inflation, particularly in the period since 2000. However, the policy response has not been sufficiently restrictive to generate a recession or even a significant slowdown in rates of economic growth. This is partly the result of greater confidence on the part of the Reserve Bank of Australia that the threat of inflation is under control and partly the result of a broader change of thinking about current account imbalances, which developed in response to the perceived policy errors of the early 1990s. According to the contemporary, 'consenting adults' view, current account imbalances are viewed as market outcomes which will only be problematic if prudential regulation is inadequate. Thus, the current account is no longer a target of monetary policy. The question of whether large current account imbalances will eventually generate increased vulnerability to adverse shocks, or whether the growing volume and sophistication of capital markets has rendered such concerns obsolete is central in addressing the sustainability of the current expansion. It may also be argued that the Reserve Bank has been more skilful, or luckier, in the present cycle than it was in the past and also that it has made better judgements than other central banks facing similar fundamentals, such as the Reserve Bank of New Zealand. This argument obviously raises the question of whether such superior performance can be sustained. In this brief article, we will discuss some of the issues regarding the contribution of changes in monetary policy to the longevity of the current boom, and their implications for the sustainability of continued expansion. We begin with an overview of monetary policy and its relation to inflation since 1970. Next we discuss changing views of the current account and their implications. Finally, some concluding comments are offered. Inflation, Financial Overheating and Monetary Policy Figure 1 charts CPI inflation against short-term interest rates since 1970 and indicates that periods of high inflation in Australia have often been associated with the imposition of high short term interest rates. This pattern is particularly clear during the 1974-5 recession and again in the early 1980s recession. The relationship breaks down somewhat during the remainder of the 1980s because the interest rate spikes of 1986 and 1989 both occurred amidst only modest increases in headline inflation and amidst more or less persistent falls in underlying inflation. As argued below, the high interest rate response of the late 1980s was primarily intended to fight other problems, such as domestic financial overheating and current account problems. [FIGURE 1 OMITTED] Australia's inflation problem, especially during the 1970s and early 1980s, was largely driven by pressures from labor markets. …

Liquidity Shocks and Asset Price Boom/Bust Cycles

We provide systematic evidence for the association of liquidity shocks and aggregate asset prices during mechanically identified asset price boom/bust episodes for 18 OECD countries since the 1970s, while taking care of the endogeneity of money and credit. Our derivation of liquidity shocks allows for frequent shifts in velocity as they are derived as structural shocks from VARs in growth rates. Residential property price developments and money growth shocks accumulated over the boom periods are able to well explain the depth of post-boom recessions. We further suggest that liquidity shocks are a driving factor for real estate prices during boom episodes. During normal times however, the relative predictive power of liquidity shocks seems to shift from asset price inflation to consumer price inflation. The results only hold for broad money growth based liquidity shocks and not for private credit growth shocks.

Inflation‐Plus Targeting at the Reserve Bank of Australia

AbstractThis article first outlines the dynamics of what appear to be increasingly prevalent cycles of asset price inflation in liberalised financial systems, as well as the difficulties entailed in successful monetary policy responses. The article then analyses the Reserve Bank of Australia's policy responses to recent rises in credit growth and asset price inflation in the property sector. The Bank's responses are characterized in terms of an inflation‐plus targeting framework which has subtly redefined the Bank's approach to inflation targeting to include vaguely defined factors such as mediumterm‘risks’, as well as extending the time frame of such risk assessment. The article explains why, for a variety of reasons, the Bank has been reticent to fully declare its hand.

Asset‐based reserve requirements: reasserting domestic monetary control in an era of financial innovation and instability

This paper argues for developing a new system of financial regulation based upon asset‐based reserve requirements (ABRRs). Such a system represents a shift in regulatory focus away from the traditional concern with the liability side of financial intermediaries' balance sheets. ABRRs have both significant macroeconomic and microeconomic advantages. At the macroeconomic level, they can provide policy makers with additional policy instruments. This is particularly useful in light of recent concerns about the dangers of asset price inflation and the potential need to target asset prices. They can also help restore the traction of monetary policy at a time when banks are becoming a smaller part of the financial landscape. At the microeconomic level, they can be used to discourage excessive risk taking by financial intermediaries. Finally, they can also raise considerable seignorage. To be fully effective, a system of ABRRs should be applied to all financial intermediaries.

Sending money home: are remittances always beneficial to those who stay behind?

AbstractThis paper examines the importance of remittances from international migrants to those who stay behind. The paper looks in particular at the Zimbabwean case, and argues that while money sent from the ‘other side’ has a beneficial effect on close kin, remittances can also undermine the purchasing power of those households without migrating members. This is in part a result of asset price inflation, and in part due to the inflationary effects of parallel currency markets. The situation for those excluded from benefiting from foreign currency inputs is aggravated by chronic scarcity in the availability of consumables. The paper argues that further research is required to understand the costs, as well as the benefits, of money sent home by migrants, in terms of assessing the class and social agency of different groups of remittance senders and receivers. The paper suggests that one non‐economic, but significant effect, of remittance‐underwritten parallel markets might be an undermining of inclusive governance and democratic state accountability in the long‐run. © 2003 John Wiley & Sons, Ltd.

Asset price inflation and monetary policy

It is crucial that central banks and regulatory authorities be aware of effects of asset price inflation on the stability of the financial system. Lending activity based on asset collateral during the boom is hazardous to the health of lenders when the boom collapses. One way that authorities can curb the distortion of lenders' portfolios during asset price booms is to have in place capital requirements that increase with the growth of credit extensions collateralized by assets whose prices have escalated. If financial institutions avoid this pitfall, their soundness will not be impaired when assets backing loans fall in value. Rather than trying to gauge the effects of asset prices on core inflation, central banks may be better advised to be alert to the weakening of financial balance sheets in the aftermath of a fall in value of asset collateral backing loans.

What Drives the Fed to Act?

:This paper studies the determinants of monetary policy since 1980 to see whether the Fed has truly followed an ad hoc approach, or whether some variables playa more important role in determining monetary policy than others. The results suggest that the Fed consistently responds to the unemployment rate, and that changes in the unemployment are the most important determinant of monetary policy. The results also indicate that the Fed responded, for some periods, to the real rate of return in the stock market, especially to lower the risk offinancial instabilities, rather than to control asset price inflation.

Endogenous Money and Asset Price Inflation: Reply

Endogenous Money and Asset Price Inflation: Reply

A Post Keynesian Theory of Asset Price Inflation with Endogenous Money

A fundamental building block of Post Keynesian economics recognizes that a modem economy's stock of money is endogenous, since the banking system is able to supply any quantity of credit money on demand (Davidson, 1968; Robinson, 1970; Weintraub and Davidson, 1973; Kaldor, 1980; Moore, 1988; Wray, 1990). This means that inflation cannot be caused by nominal money supply growth but is due to nonmonetary factors such as income distribution conflict in the labor market (Wallich and Weintraub, 1971; Eichner and Kregel, 1975; Rowthorn, 1977; Davidson, 1978, pp. 347-52; Cornwall, 1984; Kregel, 1989; Dalziel, 1990; Arestis and Skott, 1993). Over the last decade or longer, high unemployment and antiunion legislation in the English-language OECD countries have weakened the ability of organized labor to press for higher wages. As Post Keynesian theory predicts, this has suppressed consumer price inflation at the expense of greater income disparities. Throughout this period, however, there have been several episodes around the world in which property prices or the value of sharemarket equities have risen significantly, even while consumer prices and workers' wages remained relatively stable. Such asset price inflations require close attention, for at least two reasons. First, an increase in sharemarket or property values can itself contribute to more general inflationary pressures (through wealth effects on consumer expenditure,

Monetary Policy, Land Prices, and Collateral Effects on Economic Fluctuations: Evidence from Japan

This paper attempts to analyze empirically how impact on collateral values can magnify effects of monetary tightening on the economy. Theoretically, this paper is motivated by “financial accelerator” effects stemming from impacts of monetary policy on financing conditions. In this context, recent economic conditions in Japan deserve our special attention for several reasons. One, a large fraction of business investment financed by bank loans is secured by land. Two, excessively sharp increases in the land dependence of small firms with the asset price inflation in the late 1980s may make a collateral effect bigger, if it exists. Extending existing work to a model with land prices, I find a strong effect of monetary policy on land prices: monetary tightening associated with a rise in the short-term interest rate produces a significant and persistent decline in land prices. I then analyze a role of land prices in the monetary transmission mechanism. Two results are interesting. One, after monetary tightening, output falls. But the impact on output appears more severe and deeper than was predicted in existing studies. Two, the monetary policy shock turns out to be an important source of output variation, as opposed to the findings of existing work in which monetary policy explains output fluctuations very little. The implication is that together with reduced flows of credit after monetary contraction, movements in land prices may play a significant propagating role in the monetary transmission mechanism.J. Japan Int. Econ.September 1998,12(3), pp. 175–203. Korea Research Institute for Human Settlements, Kwanyang-dong, 1591-6, Dongan-Gu, Anyang, Korea 431-712.Copyright 1998 Academic Press.Journal of Economic LiteratureClassification Numbers C32, E32, E52.

ASSET PRICE INFLATION AND MONETARY POLICY

ASSET PRICE INFLATION AND MONETARY POLICY

The Geography ofEndaka: Industrial Transformation and Regional Employment Changes in Japan, 1986–1991

EDGINGTON D. W. (1994) The geography of endaka: industrial transformation and regional employment changes in Japan, 1986–1991, Reg. Studies 28, 521–535. The paper assesses the implications of Japan's severe currency realignment of the mid-1980s (endaka) for national and regional employment trends. Disaggregated data are used to show that the sudden deterioration in the Japanese labour market following 1985, and its subsequent recovery up to 1991, had unequal spatial outcomes. The adverse effects of endaka, and the impact of the subsequent economic ‘bubble' based on asset price inflation, were highly differentiated between the sectors of the economy and also between the regions of Japan. It is argued that from 1986 to 1991 a new geography of Japan's economy and labour markets emerged at the prefectural level, comprising increasing service sector jobs in Tokyo, Osaka and Nagoya, strong growth of production jobs in Tokai (Chukyo) and Tohoku, and a much slower recovery in employment opportunities for Japan's ...

Asset Prices, Financial Liberalization and the Process of Inflation in Japan

This paper examines the extent to which the Japanese asset price cycle of the 1980s was determined by monetary factors, the real business cycle, and financial liberalization. Strong evidence is found of a shift in the relationships between monetary factors and land price inflation in the early 1980s. In particular, the estimated parameters of a vector autoregression imply that the transmission of monetary factors to asset prices was greater in the 1980s than In the 1970s. A key conclusion is that monetary shocks led to more asset price inflation and less consumer price inflation in the 1984-93 period than during 1970-83.

Money, Prices, and Wages in the Confederacy, 1861-65

Previous articleNext article No AccessMoney, Prices, and Wages in the Confederacy, 1861-65Eugene M. LernerEugene M. Lerner Search for more articles by this author PDFPDF PLUS Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinkedInRedditEmail SectionsMoreDetailsFiguresReferencesCited by Journal of Political Economy Volume 63, Number 1Feb., 1955 Article DOIhttps://doi.org/10.1086/257626 Views: 10Total views on this site Citations: 20Citations are reported from Crossref Copyright 1955 The University of ChicagoPDF download Crossref reports the following articles citing this article:Alessandro Belmonte, Désirée Teobaldelli, Davide Ticchi Tax morale, fiscal capacity, and war, Annals of Public and Cooperative Economics 36 (Jul 2022).https://doi.org/10.1111/apce.12388Veronika Akhmadieva Fiscal adjustment in a panel of countries 1870–2016, Journal of Comparative Economics 50, no.22 (Jun 2022): 555–568.https://doi.org/10.1016/j.jce.2021.12.003Bryan P. Cutsinger Forced savings and political malinvestment: an application of steve horwitz’s microfoundations and macroeconomics, The Review of Austrian Economics 34, no.22 (Jun 2020): 311–322.https://doi.org/10.1007/s11138-020-00502-zBryan Cutsinger Forced Savings and Political Malinvestment, SSRN Electronic Journal (Jan 2020).https://doi.org/10.2139/ssrn.3565510Pablo Duarte, Marcel Freidinger, Andreas Hoffmann Military casualties and exchange rates during the First World War: did the Eastern Front matter?, The Economic History Review 72, no.44 (Sep 2018): 1312–1334.https://doi.org/10.1111/ehr.12774Bryan P. Cutsinger, Joshua S. Ingber Seigniorage in the Civil War South, Explorations in Economic History 72 (Apr 2019): 74–92.https://doi.org/10.1016/j.eeh.2018.11.001Bryan Cutsinger, Joshua Ingber Seigniorage in the Civil War South, SSRN Electronic Journal (Jan 2018).https://doi.org/10.2139/ssrn.3141272Pablo Duarte, Marcel Freidinger, Andreas Hoffmann War News and Exchange Rates During World War I: The Eastern versus the Western Front, SSRN Electronic Journal (Jan 2016).https://doi.org/10.2139/ssrn.2715399Mark Thornton, Robert B. Ekelund The 'Confederate' Blockade of the South, SSRN Electronic Journal (Jan 2012).https://doi.org/10.2139/ssrn.2071304Bruce W. Hetherington, Peter J. Kower Technological diffusion and the Union blockade, Explorations in Economic History 48, no.22 (Apr 2011): 310–324.https://doi.org/10.1016/j.eeh.2011.01.003Niccolo Leo Caldararo The Theory of Banking: Why Banks Exist and Why We Fear Them, SSRN Electronic Journal (Jan 2011).https://doi.org/10.2139/ssrn.1908310Gary Pecquet, George Davis, Bryce Kanago The Emancipation Proclamation, Confederate Expectations, and the Price of Southern Bank Notes, Southern Economic Journal 70, no.33 (Jan 2004): 616–630.https://doi.org/10.1002/j.2325-8012.2004.tb00592.xGloria Vollmers Industrial slavery in the United States: the North Carolina turpentine industry 1849–61, Accounting, Business & Financial History 13, no.33 (Nov 2003): 369–392.https://doi.org/10.1080/09585200310001606626Richard C. K. Burdekin, Marc D. Weidenmier Suppressing Asset Price Inflation: The Confederate Experience, 1861-1865, Economic Inquiry 41, no.33 (Jul 2003): 420–432.https://doi.org/10.1093/ei/cbg018Marc D. Weidenmier Turning Points in the U.S. Civil War: Views from the Grayback Market, Southern Economic Journal 68, no.44 (Apr 2002): 875–890.https://doi.org/10.1002/j.2325-8012.2002.tb00463.xWilliam O. Brown, Richard C. K. Burdekin Turning Points in the U.S. Civil War: A British Perspective, The Journal of Economic History 60, no.11 (Jul 2012): 216–231.https://doi.org/10.1017/S0022050700024712Gary M Pecquet Money in the trans-Mississippi confederacy and the confederate currency reform act of 1864, Explorations in Economic History 24, no.22 (Apr 1987): 218–243.https://doi.org/10.1016/0014-4983(87)90013-1Forrest Capie Conditions in which very rapid inflation has appeared, Carnegie-Rochester Conference Series on Public Policy 24 (Jan 1986): 115–168.https://doi.org/10.1016/0167-2231(86)90007-2John Foster THE REDISTRIBUTIVE EFFECTS OF INFLATION-QUESTIONS and ANSWERS*, Scottish Journal of Political Economy 23, no.11 (Jun 2008): 73–98.https://doi.org/10.1111/j.1467-9485.1976.tb01196.xEugene M. Lerner Investment Uncertainty During The Civil War—A Note On The McCormick Brothers, The Journal of Economic History 16, no.11 (Feb 2011): 34–40.https://doi.org/10.1017/S0022050700064846

The Monetary and Fiscal Programs of the Confederate Government, 1861-65

The Monetary and Fiscal Programs of the Confederate Government, 1861-65