G10 report on asset prices

Report: Turbulence in Asset Markets: The Role of Micro Policies

Report: Summary of questionnaire results

A working group under the G10 umbrella today released the report "Micro policies and turbulence in asset markets". The working group was chaired by Mr Lars Heikensten and the report primarily written by staff at Sveriges Riksbank, with valuable contributions from staff at the Bank of England, Bank of Ireland and De Nederlandsche Bank as well as the BIS and the IMF.

The starting point of the report is that the importance of asset prices for the real economy has grown substantially over the past decades. During the same period, there have been several booms and busts in asset markets in several countries, which have had a significant impact on the economy. There is a common view among policy makers in the industrialised world that it is problematic to use broad-brush fiscal policy and monetary policy measures to influence asset markets. Against this background, the report explores how micro policies can be used, such as regulation of the financial sector and taxes.

The main conclusions are, firstly, that policymakers should focus on the structure of the financial system, which on the one hand should give limited incentives to participate in the build-up of price bubbles, and, on the other hand, should lead to booms and busts in asset markets having limited consequences for the economy as a whole. Key words here are robustness, neutrality and transparency.

Secondly, when considering changes in taxes, regulations etc, for whatever reason there is, policymakers should more systematically consider the potential consequences of these changes on asset prices and financial stability.

Finally, there is the question of what to do in a worst case scenario; if there are reasons to believe that financial stability is at risk. The conclusion is that the most promising avenue is measures aimed directly at financial sector participants, rather than directly towards asset prices. Experience tells us that the real economy consequences of a bubble bursting are considerably smaller if the financial system is not severely damaged.

The report, which is presented as the working group's report, served as a basis for discussion at the G10 Ministers and Governors meeting in September 2002.

The report is available on Sveriges Riksbank's website, where Mr Lars Heikensten's introduction at the above mentioned meeting can also be found.