Asset price inflation is much easier to diagnose through the rear mirror than in real time.
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Ironically, cyclical inflation is deflationary, particularly asset price inflation within the context of an extended deleveraging process.
Asset price inflation, an older term for irrational exuberance found in the writings of Austrian school economists, is a monetary virus infecting capital markets.
FORBES: Despair and Hope Beyond Chairman Bernanke's Monetary Cliff
Investors aware of history can see disturbing similarities with the Great Asset Price inflation of the mid-1930s which culminated in the Roosevelt recession of 1937-8.
FORBES: Despair and Hope Beyond Chairman Bernanke's Monetary Cliff
But if asset price inflation turns to asset price deflation first, bringing about recession, then goods and services inflation is pre-empted in the immediate cycle.
FORBES: Despair and Hope Beyond Chairman Bernanke's Monetary Cliff
This typically appears later than asset price inflation.
FORBES: Despair and Hope Beyond Chairman Bernanke's Monetary Cliff
Then, excess demand resulted in higher inflation, huge current-account deficits and rampant asset-price inflation.
Just as conventional inflation can distort the allocation of resources, so asset-price inflation distorts economic behaviour by causing households to save too little and to pour too much money into property.
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Asset-price inflation is just as harmful for economies as inflation in the prices of goods and services.
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In recent years, though, there has been disappointingly little research on how monetary policy should respond to asset-price inflation.
ECONOMIST: Should central banks try to target asset-price inflation?
Several other countries have expressed concern that the Fed's decision could further strengthen their currencies and lead to asset-price inflation.
Foaming asset prices are reviving the debate about whether the Federal Reserve should raise interest rates to cool down asset-price inflation.
Seven decades ago, asset-price inflation was also associated with rapid credit expansion.
ECONOMIST: Should central banks try to target asset-price inflation?
The answer is that asset-price inflation can be harmful to economic health in the same way as inflation in the prices of goods and services.
ECONOMIST: Should central banks try to target asset-price inflation?
IR You correctly recognise one of the key causes of asset-price inflation during the past three years excessive leverage by noting that margin debt has doubled since 1996.
Asset-price inflation can harm the economy as much as consumer-price inflation.
But low interest rates, in turn, risk further fuelling asset-price inflation.
Singapore's move also comes as authorities across Asia grapple with asset-price inflation amid capital inflows from developed economies, following monetary easing programs announced in recent months by major central banks including the U.S. Federal Reserve.
Likewise, asset-price inflation can distort price signals.
ECONOMIST: Should central banks try to target asset-price inflation?
Watch the rise of asset price bubbles as inflation risks increase.
Asset deflation coupled with consumer-price inflation is a powerful recipe for political discontent.
Perhaps the main risk now facing emerging Asia is not feeble demand in the West but inflation or asset-price bubbles at home.
The authors use three different macroeconomic models to simulate the effect of central banks' responding to asset-price movements as well as inflation.
With central bankers' success in recent years in conquering consumer-price inflation has come a reluctance to deal with asset prices, such as those of stocks and houses.
Indeed, the consequences of large increases in asset prices can be much more serious for economies than consumer-price inflation.
However, the report argues that central bankers should respond to asset-price movements for other reasons than merely their direct impact on inflation.
Mr Bernanke wrote another paper with Mr Gertler arguing that central banks would do better not to try to stabilise asset prices but instead to concentrate on a target for consumer-price inflation.
Officials at the European Central Bank, the Bank of England, the Reserve Bank of Australia and the Bank for International Settlements (the central banks' central bank) have given some support to the view that monetary policy should sometimes lean against a rapid growth in asset prices and build-up of debt, even if consumer-price inflation is low.
The recession was caused not, as before, by inflation taking off, but by the bursting of an asset-price bubble.
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