The science of bubble spotting

Even before the collapse of the housing bubble in the United States and around the world there was a substantial debate in the field of macroeconomics concerning whether central banks should take asset prices into account when deciding on the course of their monetary policy. I would like to suggest that the appropriate answer here should be yes. The failure to do so became abundantly clear somewhere around the end of 2008, even though I can sympathize with the view that it was not the housing crash that brought down the worldwide economy, but rather failures of central banks to do their jobs by allowing nominal GDP to crash almost 2 full years after the housing bubble burst. Think about it, not much happened between 2006 and 2008. In any case, it is pointless to debate whether or even what central banks should do to try and limit the effects of asset bubbles if we don’t have a way to tell when such a bubble is present to begin with.

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