IMF Shifts Advice to Banks on Asset Bubbles |
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July 21,2010
The International Monetary Fund's executive board said central banks may want to use interest rates in a "limited" way the next time they encounter an asset bubble that needs to be pricked, weighing in as the Federal Reserve and other major central banks reevaluate their bubble-fighting strategies.
The International Monetary Fund's executive board said central banks may want to use interest rates in a "limited" way the next time they encounter an asset bubble that needs to be pricked, weighing in as the Federal Reserve and other major central banks reevaluate their bubble-fighting strategies.
Before the global financial crisis, the Fed's main strategy for addressing bubbles was to mop up after they burst, lowering interest rates to cushion the blow to the economy and restart growth. That was a central conclusion of the academic work of Ben Bernanke before he became Fed chairman and was an approach embraced by his predecessor Alan Greenspan.
But the depth of the global downturn, prompted by the bursting of a real-estate bubble in the U.S., has led to a rethinking. The IMF, in a paper released Tuesday, urged central banks to use tougher regulation to head off asset bubbles, including tighter capital requirements for banks, limits to banks' use of short-term loans and tougher collateral requirements for loans they make.
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