Measuring the Macroeconomic Risks Posed by Asset Price Booms

Stephen G. Cecchetti

in Asset Prices and Monetary Policy

Published by University of Chicago Press

Published in print October 2008 | ISBN: 9780226092119
Published online February 2013 | e-ISBN: 9780226092126 | DOI:
Measuring the Macroeconomic Risks Posed by Asset Price Booms

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This chapter examines equity and housing price booms and crashes from a risk management perspective. Using equity price data from twenty seven countries and housing price data from seventeen countries, it looks at the various consequences of rising equity and housing prices for growth and inflation. It begins by examining how asset price booms influence the mean and variance of deviations in output and price level from their (time-varying) trends. It then proceeds to measure both the GDP at risk and the price level at risk that these booms create. The results shows that housing booms are bad in virtually every way imaginable; they drive the output gap down, increase its volatility, increase GDP at risk, and push the lower tail of outcomes even lower. By contrast, equity booms have little impact on either the level or volatility of the output and price-level gaps at horizons of three years; do not change GDP at risk, but increase the risk of prices falling dramatically below trend; and drive the lower tail (ETL) even lower.

Keywords: housing prices; equity; risk management; economic growth; inflation; GDP; asset price booms

Chapter.  12460 words.  Illustrated.

Subjects: Macroeconomics and Monetary Economics

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