Monetary Policy, Bubbles, and the Knowledge Problem

This article challenges the validity of the the assumption that monetary policymakers can correctly identify asset price bubbles in time to respond preemptively (or at least usefully). This is something where many policymakers even previously skeptical now feel they can be like Supreme Court Justice Potter Stewart and recognize obscenity in asset prices when they see it. Some patterns do emerge if we look more carefully at the historical record of asset price booms and busts, but, in light of those patterns, the prospect of getting the call right becomes very daunting. The difficulty arises because of the complex nature of asset price booms and busts, a complexity that seems to be overlooked in the advocacy of leaning against the wind.