After all, central banks are not likely to have informational advantage over the market in assessing to what extent asset price movements are due to fundamentals and to what extent they are following what is called a “pathological path.” Moreover, central bank stabilization of asset prices can generate moral hazard problems; that is, the implicit “safety net” created by the central bank could provide an incentive for greater risk-taking in pursuit of returns.
Furthermore, monetary policy tends to have a weak linkage with many asset prices. We know for instance that most fluctuations in equity prices occur for reasons unrelated to monetary policy. Nevertheless, recent events support the need for flexibility in this thinking. Preemptive measures against the build up of asset price bubbles need not be incompatible with inflation targeting, which is an information-intensive approach.