Now I would like to return to the first condition, the one I sidestepped a few minutes ago--the question of identifying market bubbles in a timely fashion. The ECB article stressed that such identification is a tricky proposition because not all the fundamental factors driving asset prices are directly observable, as the productivity acceleration and stock market boom of the 1990s illustrate.
For this reason, any judgment by a central bank that stocks or homes are overpriced is inherently highly uncertain. Under extra action, mistakenly identifying a bubble has significant costs. By acting to mitigate a nonexistent problem, the central bank reduces real economic activity and inflation below their desired levels to no purpose.