As the various asset price bubbles of the past decades or so inflated, and in some cases burst, there was vigorous debate about what, if anything should be done about them. The two main camps were those who advocated doing nothing, on the grounds that monetary policy should be focused solely on inflation, and those who thought that the settings of monetary policy should take asset prices into account. The first group won the debate at the time, at least as far as actual policy was concerned, with consequences we can all see. Most proponents of the do-nothing viewpoint have conceded defeat

In a paper in the (institutionalist) Journal of Economic Issues, which came out in 2006, Stephen Bell and I took a different view of the debate. We argued that there was little scope to respond to asset bubbles by changing the settings of existing monetary policy instruments, and that “any serious attempt to stabilize financial market outcomes must involve at least a partial reversal of deregulation.” Among other things, we pointed out the fact that given a presumption in favour of financial innovation, asset prices bubbles were inevitable, and that ‘In the absence of a severe failure in the financial system of the United States, it seems unlikely that ideas of a ‘new global financial architecture’ will ever be much more than ideas.’

You can read the full paper
Bell, S. and Quiggin, J. (2006), ‘Asset price instability and policy responses: The legacy of liberalization’, Journal of Economic Issues, XL(3), 629-49.

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