Furthermore, economic agents should not be given any cause to act on the basis of expectations that central banks would insure financial markets against considerable losses. Otherwise, there would be serious moral hazard problems and the public would hold the central banks accountable for specific developments in financial markets such as the performance of the stock market. This might seriously impair the central banks' goal of pursuing price stability, and thus their credibility. Central banks also face considerable problems in terms of identifying financial bubbles. After all, a bubble can only be confidently identified as such once it has burst. 5  J.E. Core, W.R. Guay and D.F. Larcker, “Executive Equity Compensation and Incentives: A Survey”, Federal Reserve Bank of New York, Economic Policy Review, April 2003, pp.27-45. 6  A. Greenspan in his Testimony before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, 16 July 2002; see also A. Greenspan, “Stock Options and Related Matters”, remarks at the 2002 Financial Markets Conference of the Federal Reserve Bank of Atlanta, 3 May 2002. 7  P. Maidment, “In Nothing We Trust”, Forbes Magazine, 7 January 2001; F. Fukuyama, “Trust: The Social Virtues and the Creation of Prosperity”, Free Press, 1995. 8  F. Fukuyama, “Social Capital and Civil Society”, 1 October 1999, paper presented at the IMF Conference on Second Generation Reforms; J. Sobel, “Can We Trust Social Capital?”, Journal of Economic Literature, Vol. XL, March 2002, pp.139-154.
Monetary policy and financial stability The recent worldwide episodes of substantial asset price swings, with their strong links to the emergence of the “new economy”, have intensified the debate among policy-makers regarding the relationship between financial stability and monetary policy. The question arises as to how monetary policy needs to deal with asset price bubbles, which have often been linked to financial stability concerns. As is generally accepted, bubbles are situations in which the prices of various types of assets differ from their fundamental market values. Asset price bubbles originate in the existence of imperfect information in financial markets, leading to the mispricing of assets and, in turn, to the distortion of investment and consumption decisions. Often, asset price bubbles occur in an environment of regime shifts, prompted by major technological innovations, which gave rise to the belief among a broad spectrum of economic agents that a new era had started. In this respect, the impact of the “new economy” on stock prices that we have experienced in recent years has not been that exceptional. However, the importance of asset price bubbles and their potentially distorting impact on economic and financial processes does not mean that central banks should make asset prices an explicit goal for their monetary policies. This idea has been refuted by many, and rightfully so. Asset prices are predominantly driven by real factors such as technological and demographic developments and preferences, which cannot be controlled by monetary policy.