Money and Asset Prices in Boom and Bust


Economic Theory

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In the 11th IEA Discussion Paper, Philip Booth asks whether world leaders at the Edinburgh G8 meeting were focusing on the right issues

Tim Congdon argues that property and share price booms are caused by loose monetary policy
In this groundbreaking study, Professor Tim Congdon argues that movements in the general level of asset prices (such as house prices and equity markets) are strongly influenced by the behaviour of the money supply.

Congdon bases his conclusions on analyses of three episodes in the UK, including the two notorious boom-bust cycles of the early 1970s and late 1980s, as well as the Great Depression in the USA between 1929 and 1933, and the prolonged malaise in the Japanese economy since the early 1990s. The study shows that the level of monetary growth is a key influence on asset price movements. These, in turn, have a powerful effect on incomes and expenditure and inflation.

This monograph is an important contribution to the critical debate on the role of monetary aggregates in setting monetary policy. It is also relevant to those working financial and investment markets who need to understand the causes of booms and busts in asset prices. Congdon’s argument, that ignoring monetary aggregates can lead to profound instability in the real economy, is compelling.

2005, Hobart Papers 152, ISBN 0 255 36570 5, 143pp, PB

Further reading:

Central Banking in a Free Society by Tim Congdon

Keynes, the Keynesians and Monetarism by Tim Congdon

Money, Inflation and the Constitutional Position of the Central Bank by Milton Friedman

The ECB and the Euro: the First Five Years by Otmar Issing

Monetarism Under Thatcher: Lessons for the Future by Gordon T Pepper and Michael J Oliver.

Professor Tim Congdon also writes a regular column for the IEA journal Economic Affairs

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