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Bank of Korea Policy and the Asset Bubble Problem
Published May 25, 2011
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Central banks have two responsibilities: (1) stabilize the value of the currency and (2) maintain public confidence in deposit money by limiting systemic risk. The first responsibility is primary, ongoing, and the exclusive responsibility of the central bank. Price stability allows market participants to anchor price expectations, and it minimizes differences between actual and expected inflation rates as participants in the market establish economic contracts. Monetary policy cannot change the long-run real performance of the economy but can influence the economy in the short run; however, central banks need to exercise caution in trying to achieve short-run effects on employment and output. Lags in the effect of monetary policy are likely to introduce instability, and the long-run goal of price stability becomes less attainable the more the central bank focuses on short-run issues.

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