It has been argued that only substantial hikes in policy rates could prick the bubble but this would be at a substantial cost to the real economy. The influence of interest rates on the speculative component of asset prices is unclear from both a theoretical and empirical perspective (Kohn, 2008).
In the context of the current global financial crisis, with deleterious impact on growth and employment and significant fiscal costs, the issue of relationship between monetary policy and asset prices needs to be revisited. It can be argued that the output losses of a pre-emptive monetary action might have been lower than the costs that have materialised from a non-responsive monetary policy.