Europeans toast Bollard's take on asset bubbles

If economists have rock-star moments, then Alan Bollard is this week's Keith Richards.

New Zealand's Reserve Bank Governor has been singled out by the chief economist of the European Central Bank for his innovative thinking - on asset price bubbles.

Otmar Issing contrasted Bollard's views with those of United States Federal Reserve chairman Alan Greenspan.

The Bollard theories turn up in an article Issing wrote for a German financial newspaper, the Boersen-Zeitung, entitled "Monetary policy and asset prices".

Issing said conventional wisdom was that a central bank should not use monetary policy in an attempt to prick an asset price bubble - when property or share prices rise to unsustainable levels - even if it fears the bubble will burst and hurt the economy. He quoted Greenspan as saying it was "far from obvious that bubbles, if identified early, could be pre-empted short of the central bank inducing a substantial contraction in economic activity".

But Issing then quoted from a speech Bollard gave last year to the Canterbury Employers' Chamber of Commerce.

In it, Bollard acknowledged it was risky to use monetary policy to constrain asset price bubbles.

But he added: "In an extreme situation the fallout from the buildup and bursting of very large asset price bubbles warrants taking some risks in an attempt to moderate ... the problem."

Bollard went on to say that "seeking to stabilise rising house prices or an overheated stock market might mean having to force inflation lower than otherwise would be required".

Monetary policy would be "tighter than if the sole objective was to keep consumer price inflation within the target range".

Issing said Bollard's remarks "open up an escape clause from the strict regime of inflation targeting, at least in the case of extraordinary circumstances". The idea, he said, seemed "all the more remarkable coming from the early pioneer of inflation targeting".

- NZPA