I just finished this paper by the Bank of England's Charlie Bean (and colleagues), which was presented to the latest Jackson Hole convention of central bankers. While it is certainly very interesting, it puts the standard Northern Hemispherean case against:
(a) the role of excessively loose monetary policy in serving as the single most important explanation of the synchronous housing and credit booms in the US and UK during the 1990s; and
(b) the RBA's preference for leaning against positive asset price and credit feedback loops that exhibit the characteristics of a so-called bubble.
In relation to the latter, the Bank of England crew offer detailed statistical analysis that implies--in a rather unconvincing fashion--that leaning against the US and UK housing market booms would have had only a mild effect on prices and credit growth. They further argue that this policy addresses the symptoms rather than the underlying causes of unsustainable exuberance in asset price developments (I myself have put the same case in the past). They posit that there are probably better 'macro-prudential' tools that can be used to address these dysfunctions.
Curiously, Bean et al do not appear to reference Spain, which is raised by the RBA’s Bloxham et al in their recent RDP, where 'dynamic provisioning' was put in place years in advance of the GFC but did not prevent a striking collapse of the Spanish housing and banking markets.
Bean et al conclude:
“The case for “leaning against the wind” by raising policy rates higher than required to meet immediate inflation and output objectives appears strengthened by recent events, but the collateral damage to output from a policy that is sufficiently aggressive to make enough of a difference to credit conditions and asset prices is likely to be quite high. Development and deployment of a macro-prudential policy toolkit focussed more directly on the underlying source of the exuberance looks a more promising way forward.”
