When investors are overly optimistic, asset prices go up to make it easy for banks to comply with, for example, increased capital-buffer requirements and more stringent loan-to-value ratio requirements. Moreover, when financial imbalances are sizable, they are likely to broadly affect many sectors of the economy, as exemplified by 1980s Japan, and this may justify the use of monetary policy.
Secondly, when excessive optimism prevails and investment-return expectations rise erroneously, the central bank should be careful to avoid nourishing expectations of prolonged low interest rates relative to their long-run, sustainable levels. These expectations are likely to fuel investment activities further, especially in property markets. This increases the magnitude of possible future winding down.