Why Should Central Bank Deflate Assets Price Bubble

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Central bank deflate assets price bubble Why should central bank deflate assets price bubble? We summarize two reasons. First reason is that when assets price bubble burst, the negative effect against the central bank’s goal. Traditional central bank’s goals are price stability, stable real growth and employment, financial stability, stable interest rates and stable exchange rates. We mainly discuss about three parts here. First of all is price stability. Price stability would mean that an economy would not experience inflation or deflation. It is not common for an economy to have price stability. But when the price of an industry or product is changing so much, it is not a good signal for the economy. Here is the graph (Graph1) for consumer price index on fuel oil. We can see that the price went constantly and had a great rise during 2000 to 2008. There was a sharp decline after 2008, but then rose again and still maintaining a very high level. During the several recessions, these sharp movements would affect the price stability of the market which against the central bank’s goal for maintaining price stability. Second of all is financial stability. Financial stability describes the condition where the financial intermediation process functions smoothly and there is confidence in the operation of key financial institutions and markets within the economy. We divide it into 3 parts, credit risk, market and liquidity risk and macroeconomic risk. When assets price bubble burst, people tend to save money rather than spend money. It arouse market and liquidity risk. Companies and all kinds of industries become harder to make money and gain profits. Therefore, these have done a very serious harm to the real economy. Further more, macroeconomic risk appeared. Financial instability and its effects on the economy may lead to a financial crisis with adverse consequences
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