In particular, if the central bank commits itself to asymmetric conduct of monetary policy – more specifically, if it does not lean against a bubble so long as prices are stable but instead intervenes aggressively after the bursting of bubbles –, the situation could get worse through the following channels. First, this kind of put option-type monetary policy engenders more risk-taking by financial institutions.
Also, with respect to consumer prices, empirical research has shown that national inflation is partly determined by global economic dynamics. Moreover, recent studies indicate that inflation in mature countries is “largely a global phenomenon”. At the current juncture, new sources of inflationary pressure may therefore emerge. Let me give some examples.