What to pour in the punch bowl? Central banks and asset prices

Abstract: Until the financial crisis of 2008-09, asset prices played a secondary role in monetary policy. The mainstream view was that they should only be accounted for to the extent they affected the inflation forecast. Quite a number of people have started to question this approach considering the huge costs incurred upon society from the US housing bubble and argue that monetary policy, i.e. the steering rate, should be used to curb excessive asset price developments. This thesis employs a qualitative approach in order to present, structure and analyse the academic debate on this topic, limited to housing prices only. It starts off with an empirical overview of a number of relevant countries, followed by an analytical review of the literature and an account of a number of interviews carried out with Swedish financial sector economists. Taken together, it is the idea that these three parts shall constitute a well-founded base from which practical policy recommendations can be made. The overall conclusion is that central banks are not apt to prevent asset price bubbles by using the steering rate or through non-traditional monetary policy. A mixture of policies which limit the debt incurrence among households should rather be the aim.