roger w ferguson, jr : asset prices and monetary liquidity remarks by mr roger w ferguson, jr, vice - chairman of the board of governors of the us federal reserve system, to the seventh deutsche bundesbank spring conference, berlin, 27 may 2005. * * * over many decades, the federal reserve and the bundesbank have enjoyed a very productive working relationship that has included sharing our concerns and insights about good policy. the sharing has been not only between our two institutions but with the policy and research communities more broadly. this conference is one more such occasion, and i am grateful to the bundesbank organizers for this opportunity to speak this evening. several of my recent assignments, both at the board and in international groups, concerned the continuing effects of financial innovation and liberalization on the scope and scale of financial activity around the globe. in fact, in terms of sheer volume, the expansion of financial activity has greatly outstripped economic growth in recent years. with wider and faster access to information, markets have become more precise, on balance, in pricing value and risk. innovation and liberalization have also brought more diverse opportunities for investors and borrowers, a wider selection of financial instruments, and generally improved risk management. the overall result has been more - efficient use of financial and real resources and, ultimately, better economic performance. many observers believe that this result has been a key factor in the strong productivity and growth that the united states has realized in recent years. many economies have become more resilient and more capable of withstanding shocks, but financial markets themselves seem to have become more sensitive to real - time data. the past decade has been marked by episodes of financial volatility that have had the potential for trouble at a systemic level. linkages between financial markets and real economic outcomes have become more complex, periodically presenting policymakers with surprises and puzzles. and, paralleling efforts by central banks at improving transparency of the policy process, heightened scrutiny of policy by markets has added both new benefits and new complexities. a particular phenomenon that touches on all these issues is the movement of asset prices, especially the prices of equities and residential real estate. because these assets are the most widely held by the general public, price changes, even when not exceptional, can significantly affect the macroeconomy. rising asset prices support household consumption, whereas falling asset prices damp consumption. in a scenario of collapse, the damage to balance sheets and private wealth could go as far as undermini

education requires long term commitment and effort from us all, but the prize is also great. ladies and gentlemen, over the next day or so, we have the opportunity to make a real and substantial contribution to this agenda. for that reason, i am most grateful to you for joining us, and i very much look forward to our discussion and exchange of views. together, i am sure we can learn and develop further many good measures. measures that will not only help consumers, but will also improve the health and strength of the financial sector and our economies more widely. thank you. bis central bankers ’ speeches