Quantitative easing tilts the balance between monetary and macroprudential policy

ABSTRACT

Quantitative easing by central banks has stimulated risk-taking in financial markets and contributed to a liquidity-driven boom in asset prices. It puts the relation between monetary policy and financial stability into a new perspective. We show by a regression analysis for a panel of 11 advanced economies that an asset price bust has adverse effects on inflation. The effect of stock prices and corporate bond rates on inflation is significant, also if we control for developments in credit. This insight implies that in conducting and implementing quantitative easing, central banks should closely monitor and take into account asset bubbles.

KEYWORDS:

• Monetary policy
• asset pricing
• bond interest rates

JEL CLASSIFICATION:

• E52
• G12
• G15

Acknowledgements

The views expressed are those of the authors and do not necessarily reflect official positions of De Nederlandsche Bank. We thank Peter van Els and Leo de Haan for useful comments and advice.