Conclusion  Asset price developments are a serious cause of concern for central banks since they may impinge upon both price and financial stability. And I would like to stress what I feel is the highly complementary nature of price stability and financial stability objectives: price stability is the bedrock on which financial stability is built. However, in my opinion, it is clearly not opportune to introduce asset prices into a monetary policy rule the central bank should commit to or in the central bank’s reaction function. Besides the reasons I already mentioned, another issue is: which asset price should we take into account? Should we limit to stock prices, or extend the rule to housing prices, exchange rate, the cost of capital and so on? I would also not support the idea of introducing asset prices into the measurement of inflation or the definition of price stability. My first reason is that the nature of goods and services on the one hand, and assets on the other hand, is quite different, and so is the information contained in their prices. Another reason is that asset prices are highly volatile, much more volatile than other prices, especially in the current context of low inflation. Consequently, it might be difficult to implement a sound monetary policy by focusing on highly volatile indicators. Finally, it is highly questionable that one could determine scientifically what an asset price equilibrium value is.
Moreover, asset prices fluctuations or changes might also activate some confidence or expectations channels that may in turn influence households’ or firms’ spending decisions. For all of these reasons, asset prices have a particular role in the conduct of monetary policy. How should central banks react? Does this mean that monetary policy should react directly to asset prices? Or, more precisely, should asset prices be directly taken into account by the central bank’s reaction function? This issue is still debated amongst researchers and academics; my feeling is that we should remain extremely cautious about it, perhaps because it would be like opening Pandora’s Box if we started setting our key policy rates according to asset price changes. Another reason for being extremely cautious is that assessing asset prices’ valuations is a very challenging exercise. And what matters is not only the asset price level per se, or the pace of its change, but also its deviation from a highly hypothetical fundamental value, which basically is hard to measure or determine. Although, from time to time, it may seem that asset price dynamics are not really correlated to overall economic development, it is generally hard to assess whether these dynamics are rooted in some deep fundamental changes or whether asset prices evolve according to some “pathological path”.