More generally, as Mervyn King once stated, it would be highly controversial if a restrictive central bank policy adopted for reasons of asset market risks would create “mini-recessions” in real activity and unemployment, when the level of inflation would be compliant with the defined and publicly-known target.
The second argument questions whether monetary policy, through its main policy instrument – short term interest rates – can effectively target asset market prices. There is no theory or model establishing a reliable relationship between interest rates and asset price targets. 4 Macro-prudential policy is therefore essential in any economy as the business and financial cycles are not synchronised.