Price bubbles - a central bank perspective

Abstract

Recent discussions, in academia and among policymakers, have increasingly paid attention to price gyrations in the stock and housing markets.A major concern has been the connection between these price movements and both financial stability and real economic performance.A related concern has been whether - and if so, how - central banks should respond to wide fluctuations in asset values.This article discusses price bubbles in the stock and housing markets, their effect on the economy, and their importance vis-à-vis the primary objectives of central banks.In addition, we briefly introduce a method that was developed at the Bank of Finland as an aid to identifying and predicting overshooting in asset prices.