Asset prices in Monetary policy?

Shyam Patabi from PWC has revisited a contentious debate in most parts of the world - taking asset prices into account in monetary policy decisions in his article.While he raises valid and important questions about the CPI and WPI index construction issues, I wonder how and why monetary policy should take into account asset prices.

Before all this, I would think that it is imperative that the RBI monitors business cycles to synchronise monetary policy reaction with business cycle movements. Secondly, what troubles me the most in including asset prices into monetary policy in a place like India is reversion back to centralised planning policies. Who decides what is a bubble? There is no doubt that monetary policy responds to asset price bubbles in an asymmetric fashion, i.e., do nothing when the bubble gets built, and then react when the bubble bursts. But why should monetary policy be doing anything else? There are other imperatives for a healthy globalised economy that would do justice to addressing asset price bubbles: a/ macro-prudential regulation; b/ gradual opening up of complementary markets to hedge risks; c/ transaction monitoring and strong anti-competitiveness policy.

These are just initial reactions to his article. More on it sometime soon...

"No doubt, setting monetary policy in line with developments in financial markets is a challenging task. But it is one that economists should embrace, rather than shy away from — at least for the sake of preventing the next mega bubble." - Next post will think about ways to address bubbles...