Washington - The International Monetary Fund on Tuesday urged central bankers to tighten monetary policy - typically by raising interest rates - when asset bubbles arise in the future, as a means to prevent financial shocks when inflated prices collapse. The recommendation was part of an IMF report on lessons from last year's financial crisis, which followed a steep decline in residential property prices in the United States and other economies.
A portion released Tuesday of the IMF's World Economic Outlook was focused on "lessons" for monetary policymakers - the central bankers who set interest rates and control money supplies - from inflating and bursting of bubbles in prices of assets such as stock market shares or real estate.
"Past asset price busts were often foreshadowed by rapidly expanding credit, deteriorating current account balances and large shifts into residential investment," said IMF economist Alasdair Scott, one of the authors of the report.
He acknowledged that it was a challenge to identify these price bubbles. Therefore central bankers cannot be expected to perfectly identify these phenomena and take appropriate action, Scott said.
The rate-setting US Federal Reserve Board and other central banks have been accused of failing to tighten monetary policy during most of the current decade as housing prices soared, possibly fueled by historically low interest rates.
The IMF report found "that monetary policy was not the smoking gun behind the current crisis."
"There is some evidence for loose monetary policy in the years leading up to the current crisis in some countries, but it is not likely to have been the main systematic cause of the booms and consequent busts across the global economy," according to a summary of the report.
Still, central bankers missed "warning signs."
The IMF report urged "tightening monetary conditions earlier and more vigorously to try to prevent dangerous excesses from building up, even if inflation appears to be under control."
