able to materially check expansions in asset bubbles. clearly, interest rates play an important role in determining the fundamental value of corporate equity, houses, and other assets. however, i noted in my earlier speech that the influence of interest rates on the speculative component of asset prices is unclear from both a theoretical and empirical standpoint. my views on this issue have not changed much, largely because of the still - murky role that monetary policy played in promoting the surge in house prices and the accompanying run - up in both conventional and subprime mortgage debt. although tighter monetary policy might have succeeded in shifting down the path of house prices, it is still not clear to what extent small or even moderate policy actions would have discouraged the broader speculative developments that have characterized the current episode : overly - optimistic expectations of price appreciation, excessive leveraging, and a marked increase in risk - taking by homeowners and investors. of course, a substantial tightening of policy, leading to a significant slowing in the economy and rise in unemployment, might have had a marked effect on housing price gains. but undertaking such a policy course on a regular basis whenever asset price misalignments are detected would likely prove to be a relatively poor strategy on average, especially given the possibility of false positives in identifying these misalignments, and the existence of other potential remedies. in general, taking moretargeted steps – for example, regulatory changes intended to strengthen the financial system – would seem a better course of action under such circumstances. to be sure, some observers contend that the low level of the federal funds rate in 2003 and 2004 was clearly a primary cause of the housing bubble, and that a significantly tighter stance of monetary policy would have been warranted. as you know, the federal open market committee ( fomc ), after having sharply lowered its policy rate during the 2001 recession, further lowered the federal funds rate in late 2002 and 2003 in response to an outlook for continued tepid real growth and a possible unwelcome disinflation. this accommodative stance helped set the stage for a more robust recovery, and as the expansion took hold in 2004, the fomc began to tighten in a gradual manner that was publicly signaled in advance. induce market - participants who know about the bubble to trade against it. whether such actions would be able to limit the expansion of asset - price bubbles merits further research. kohn and sack ( 2003 ) did not find that

, long - term interest rates were low despite the fact that their central banks did not ease as markedly as the federal reserve. a common factor behind these low rates, and perhaps in part behind the shared increase in house prices as well, is the " global saving glut " identified by chairman bernanke – the large amounts of savings, both official and private, from asian and oil - exporting nations that tended to lower neutral interest rates globally. 12 in a broader sense, perhaps the underlying cause of the current crisis was complacency. with the onset of the " great moderation " back in the mid - 1980s, households and firms in the united states and elsewhere have enjoyed a long period of reduced output volatility and low and stable inflation. these calm conditions may have led many private agents to become less prudent and to underestimate the risks associated with their actions. while we cannot be sure about the ultimate sources of the moderation, many observers believe better monetary policy here and abroad was one factor ; if so, central banks may have accidentally contributed to the current crisis. but would a somewhat tighter stance of policy in recent years have reversed this complacency? it seems doubtful. central banks would likely have needed to produce recessions of some consequence in order to force agents to reevaluate the costs of taking on risk – an outcome unlikely to improve societal welfare. rather than using the blunt tool of monetary policy to induce prudence, we should examine more closely the possibility of using regulation and prudential supervision to address concerns about overleveraging and other risk - taking behavior. in short, we still do not fully know what caused the run - up in house prices and over - building. short - term rates were low in 2002 - 04 as the federal reserve countered the risks it saw to good economic performance, and these low rates probably had some effect on housing markets at the time. but the problems largely built up after policy rates were well on their way to neutral, and other factors appear to have played major roles. we have learned little about the likely effect that a somewhat higher funds rate would have had on the speculative element of prices. of course, it is important to keep an open mind about the relationship of short - term interest rates and speculative activity. if it becomes clear that monetary policy can predictably influence the evolution of bubbles, central banks should take that ability into mian and sufi ( 2008 ) found that zip code areas with