The essence of the argument is that the typical monetary policy action of raising policy interest rate in small steps of 25–50 basis points will not help contain the surge in asset prices. On the other hand, monetary policy action aggressive enough to deter asset price build up will take a heavy toll on the real economy.
A consensus is building around the view that the most appropriate way of addressing asset prices is through macroprudential instruments, either independently or in conjunction with monetary policy. Indeed, macroprudential instruments are at the heart of the Basel 3 package which was agreed upon last year. 34. Macroprudential policies are neat in concept but throw up a host of problems in operation.