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Tempest

Asset Prices And Monetary Policy

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One for tecchies or those who are truly obsessed with HPC (or sad like me). Don't expect anyone to read all of this link (I didn't) as its very technical and turgid! It is an academic paper with an interesting underlying point about trying to find a monetary policy measure that takes into account asset price inflation (possibly heading off bubbles etc in advance).

http://www.kc.frb.org/publicat/econrev/PDF/3q00fila.pdf

Anyway, the point that occurred to me is that if we (or any other large western economy eg US) do have a real HPC crash and in a few years time people/press say "how could it have happened, why oh why did MPC/Govt not see this coming, never again etc" - is there a chance that UK or worldwide CPI measures will take asset/house prices into account properly in effecting interest rate changes?

And, if they did, would that mean that the rate of future house price inflation would be inherently capped (as interest rates would automatically rise to choke it off as it arose) - meaning that prices would take even longer to recover from this crash than ever before? Just a thought. If I were Gordon, that is how I might solve the boom/bust problem and achieve social justice (whatever that is).

Edited by Tempest

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One for tecchies or those who are truly obsessed with HPC (or sad like me). Don't expect anyone to read all of this link (I didn't) as its very technical and turgid! It is an academic paper with an interesting underlying point about trying to find a monetary policy measure that takes into account asset price inflation (possibly heading off bubbles etc in advance).

http://www.kc.frb.org/publicat/econrev/PDF/3q00fila.pdf

Anyway, the point that occurred to me is that if we (or any other large western economy eg US) do have a real HPC crash and in a few years time people/press say "how could it have happened, why oh why did MPC/Govt not see this coming, never again etc" - is there a chance that UK or worldwide CPI measures will take asset/house prices into account properly in effecting interest rate changes?

And, if they did, would that mean that the rate of future house price inflation would be inherently capped (as interest rates would automatically rise to choke it off as it arose) - meaning that prices would take even longer to recover from this crash than ever before? Just a thought. If I were Gordon, that is how I might solve the boom/bust problem and achieve social justice (whatever that is).

I agree: including HPI in the inflation figures would be a significant step to ending the boom bust cycle. But politicians would be unable to create the sort of short term synthetic boom which guarantees short term votes and instant power, so there may be reluctance to do so.

Having said that, is it entirely unfeasible for Brown to re-introduce HPI in to the CPI to take advantage of property price reductions? Difficult I know because it is the European measure but I bet if he tried hard enough he could sneak it in somehow

Edited by Baz63

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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