The Governance Methods of Asset Price Bubble

In recent ten years, the sharp fluctuation of asset prices has become a prominent phenomenon in the macroeconomic field, whether in industrialized countries or developing countries, such as the financial crisis in Southeast Asia, the stock market crisis in Japan in recent years (including the whole economy), the Internet bubble in the United States in recent years, and the currency crisis in Mexico, Russia, Brazil and other countries. How to deal with the asset price bubble? Some economists emphasize operating within the monetary policy of the monetary authorities, others advocate operating in the market, and some economists think it is unnecessary to operate.

Risk of asset price fluctuation

There are different views on whether to control asset price bubbles within the framework of monetary policy of monetary authorities. Due to the influence of financial innovation and financial globalization, after the 1990s, the monetary authorities in many countries abandoned the multi-objective theory of monetary policy objectives (namely, economic growth, price stability, full employment and balance of payments) in practice, and turned to inflation theory one after another, giving up the money supply that has been implemented for nearly 20 years and turning to flexible instrument variables such as interest rate or exchange rate and money supply. Goodhart (1995), Al-Hain and Benjiamin (1973) advocated that the generalized price index including real estate, stocks and other financial assets should be used instead of the traditional indicators reflecting the inflation degree. Generalized inflation is the traditional weighting of inflation rate and asset price growth rate. They believe that the new measurement method takes into account the changes in asset prices and can be used to guide monetary policy and improve macroeconomic operation. Once the monetary authorities find that the prices of real estate, stocks and other assets are rising too fast, even when the traditional inflation indicators such as consumer price index are still relatively stable, they should adopt a tight monetary policy. For example, if the Japanese monetary authorities took effective measures in time to deal with the rapidly rising asset prices in the mid-1980s, the emergence of the "bubble economy" could be prevented and the serious impact caused by the bursting of the "bubble economy" could be avoided. Ceccchettit and Lindsey have similar ideas.

But even in the inflation-linked theory, some people think that the monetary authorities have done nothing about asset price bubbles. Bemank and Gertler (1999; 2002) believes that the publicly announced medium-term inflation target provides a nominal target for monetary policy. This is conducive to the monetary authorities to flexibly stabilize the short-term real economy. Only when the change of asset price affects the monetary authorities' estimation of inflation can the monetary authorities take corresponding measures to control the asset price bubble. They believe that asset price bubbles are usually accompanied by an increase in productivity, which will offset (at least partially offset) the speculative elements in the market. At the same time, the reaction of monetary authorities to asset prices often causes unnecessary psychological panic in the market, and the consequences are unpredictable, which has been proved by history. They use the modified standard dynamic new Keynesian model to simulate the results of monetary authorities' actions (real interest rates respond to inflation rate, output gap and asset prices respectively). They allow information factors in the credit market (that is, there is a cost for lenders to supervise borrowers) and allow exogenous changes in stock prices (that is, changes caused by non-fundamental changes). The simulation results show that it is the best choice not to respond to asset prices under any circumstances. Moreover, actively targeting inflation (radical in-F 1-Targeting) not only reduces inflation, but also reduces the output gap, which is "accommodating". At the same time, the narrowing of the gap will promote the fundamental changes in asset prices. Therefore, the best policy choice to keep an eye on inflation policy is to respond only to inflation, but not to changes in asset prices. Mishkin and Lucas also believe that the monetary authorities should focus on inflation rather than anything else.

Federal Reserve Board of the United States

In the practice of monetary policy, Alan Greenspan, Chairman of the Board of Directors of the US Federal Reserve, warned against irrational prosperity (i.e. asset price bubble) in 1996, but he has always been cautious about the price changes in the US securities market. Some economists of the Federal Reserve, represented by him, believe that: First, a stable inflation target can provide a good premise for people to control funds, and at the same time, it is conducive to the improvement of company performance. It is not surprising that the stock market price has risen. Second, the decline in the US stock market price is partly due to the share price decline caused by the split share structure of listed companies. Third, even after the price drop, the real wage level, business capital expenditure and productivity of the American economy are higher than a few years ago, which is completely different from Japan. After the overall economic recession in Japan, asset prices fell. Therefore, Greenspan further believes that asset price bubbles are difficult to identify at first, and even if the monetary authorities can identify them, there is nothing they can do, because raising interest rates will inevitably lead to economic recession. Of course, when the bubble bursts, the monetary authorities should take timely measures (cure).

The use of Tobin tax is also an important issue in the discussion of controlling asset price bubbles. Tobin tax originated from the proposition put forward by J Tobin in 1970s, that is, to levy a small tax on all foreign exchange transactions (such as 0. 1% or 0.5%), and use the collected funds to overcome world poverty. Its purpose is to "add some sand to the roulette wheel of international financing", thus slowing down the speed of currency trading, increasing costs and reducing speculation. Some people borrowed this idea, hoping to at least control the asset price bubble by increasing transaction costs. Because in the process of the formation and growth of asset price bubble, the demand of asset demanders is always related to borrowing, especially to excessive borrowing. Therefore, by increasing the difficulty of borrowing or the interest rate of borrowing, we can curb the excessive demand for assets and help curb the expansion of asset prices. Shiller(2000) thinks that the monetary authorities are unwilling to intervene in the market for two reasons: first, they think the market is effective; The second is the diversification of financial markets. But he thinks that market efficiency is only half true and half false; The diversification of financial markets does not exclude the intervention of monetary authorities. He further believes that the monetary authorities can send a signal to the market by raising the capital ratio requirement of loans (that is, the ratio between their own funds and the loan amount), warning investors not to borrow excessively, and at the same time expressing the desire to cool the market. However, some people don't think that the increase of transaction costs plays a particularly important role in eliminating asset price bubbles. As mentioned above, Scheinkman and Xiong (2003) believe that the increase of transaction cost can only effectively reduce the transaction frequency, and has little effect on the size of the bubble.

Deniel, Hirshleifer and Teoh(2002) believe that asset price bubbles should be eliminated at the market level. After analyzing the unreasonable price, they put forward some policy suggestions to eliminate the price bubble by using the theory of investor psychology. Due to the limited attention and handling ability of investors and overconfidence, government decision-making should focus on helping investors avoid mistakes and improve market efficiency. In a free market, the measurement criteria are generally: (1) the intelligence of investors, (2) the protection of enterprises' own reputation, and the ability of intermediaries in the market (such as auditing and rating), and (3) the law (although the role of law in the market is controversial). Therefore, they believe that strengthening the management of information disclosure and financial reports is conducive to eliminating asset price bubbles. At the same time, it is necessary to limit false advertisements of enterprises and strengthen investor education. In addition, the government should improve its own behavior, such as long-term inflation and changing monetary policy, which will have a negative impact on investors. Of course, the government can also directly intervene in the market and restrict certain transactions under certain circumstances. Regarding the disclosure of information, they suggested that the information disclosed should be obvious and easy to handle. The government should stipulate the corresponding time, method, content and format of information disclosure, so as to facilitate investors to obtain and process the disclosed information. At the same time, they suggested limiting the recommendation or analysis of some intermediaries (such as brokers and securities analysis institutions) to avoid misleading investors.