In the medium term, the monetary policy reaction to downturns on the asset markets influences market participants’ risk perception in the following upturn. This is especially evident where monetary policy makers apply a risk management approach that asymmetrically lowers rates in times of severe financial market downturns, over and above what would be deemed necessary given the baseline outlook on prices and growth.
A more symmetric approach would treat boom and bust episodes not as isolated events but would try to look through the financial cycle in order to steady policy.