However, in my opinion and that of others, the risk of such an approach is in overdoing it and thereby delaying a necessary adjustment of balance sheets and debt levels. New imbalances in other markets could then arise and the process will begin again. When the situation turns next time in other asset markets, there is a greater risk of reaching the zero-interest rate level. Many central banks have acted in this way, which may be the reason why a house price bubble has been created some time after a share price bubble. In my opinion, the economic costs in the shape of sharp fluctuations in demand are likely on average to be higher if the central bank does not take account of the effects on growth and inflation of inflated asset prices and credit expansion in its decisions. One reason for this is the high costs connected with the risk of achieving the zero-interest rate level if one waits until asset prices and indebtedness are corrected and demand is severely subdued before taking interest rate measures. Monetary policy after the stock market bubble The share price bubble at the end of the 1990s is an example of a financial imbalance that was built up despite low and stable inflation.
One can express this as, if many imperfections impact at the same time, it could lead to substantial financial imbalances. Empirical research confirms that asset prices and loans can increase substantially over a long period of time and my impression is that the mechanisms I have indicated have contributed to this. While debt and asset price levels have built up slowly over a number of years, price corrections have occurred quickly. The entire cycle from start to finish, from asset price and credit expansion until the repercussions of price falls and debt reductions have waned can take up to a decade. The IMF, for instance, reports in a study that the repercussions alone from a share price crash take on average two years to wane, while it takes approximately four years for the effects of a house price crash to fade. Can and should monetary policy subdue the growth of bubbles? Even if we as monetary policy decision-makers assess that there is reason to feel concern that debts and asset prices have been pushed up by over-optimistic households and companies, it is not selfevident whether and how this will affect the decisions. There is always some uncertainty as to whether it really is a question of an imbalance. And, as I have said, it is not easy to quantify a risk scenario, both with regard to the probability that it will occur and the effects it can have for inflation and demand.