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Asset Prices and Monetary Policy$
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John Y. Campbell

Print publication date: 2008

Print ISBN-13: 9780226092119

Published to Chicago Scholarship Online: February 2013

DOI: 10.7208/chicago/9780226092126.001.0001

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Measuring the Macroeconomic Risks Posed by Asset Price Booms

Measuring the Macroeconomic Risks Posed by Asset Price Booms

(p.9) 1 Measuring the Macroeconomic Risks Posed by Asset Price Booms
Asset Prices and Monetary Policy

Stephen G. Cecchetti

University of Chicago Press

This chapter examines equity and housing price booms and crashes from a risk management perspective. Using equity price data from twenty seven countries and housing price data from seventeen countries, it looks at the various consequences of rising equity and housing prices for growth and inflation. It begins by examining how asset price booms influence the mean and variance of deviations in output and price level from their (time-varying) trends. It then proceeds to measure both the GDP at risk and the price level at risk that these booms create. The results shows that housing booms are bad in virtually every way imaginable; they drive the output gap down, increase its volatility, increase GDP at risk, and push the lower tail of outcomes even lower. By contrast, equity booms have little impact on either the level or volatility of the output and price-level gaps at horizons of three years; do not change GDP at risk, but increase the risk of prices falling dramatically below trend; and drive the lower tail (ETL) even lower.

Keywords:   housing prices, equity, risk management, economic growth, inflation, GDP, asset price booms

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