Ben Bernanke and Mark Gertler examine the implications of asset price volatility for monetary policy. They argue that central banks should focus on underlying inflationary pressures rather than directly targeting asset prices, as doing so can have undesirable side effects. Asset prices become relevant only when they signal potential inflationary or deflationary forces. The authors base their conclusions on simulations of different policy rules in a macroeconomic model and a comparative analysis of U.S. and Japanese monetary policy. The paper discusses how asset price volatility interacts with the real economy and the implications for monetary policy. It highlights that asset price fluctuations can have significant effects on the real economy through mechanisms such as the balance sheet channel. The authors argue that flexible inflation targeting is the best policy framework for achieving both price stability and financial stability. This approach allows central banks to respond to inflationary or deflationary pressures without directly targeting asset prices, which can be difficult to assess. The paper also explores the effects of asset price bubbles on the economy under different monetary policy rules. It finds that policies focused on stabilizing inflation are more effective at moderating the disruptive effects of asset market disturbances. The authors conclude that monetary policy should focus on macroeconomic fundamentals rather than asset prices, as targeting asset prices can be destabilizing. They emphasize the importance of flexible inflation targeting in maintaining economic stability.Ben Bernanke and Mark Gertler examine the implications of asset price volatility for monetary policy. They argue that central banks should focus on underlying inflationary pressures rather than directly targeting asset prices, as doing so can have undesirable side effects. Asset prices become relevant only when they signal potential inflationary or deflationary forces. The authors base their conclusions on simulations of different policy rules in a macroeconomic model and a comparative analysis of U.S. and Japanese monetary policy. The paper discusses how asset price volatility interacts with the real economy and the implications for monetary policy. It highlights that asset price fluctuations can have significant effects on the real economy through mechanisms such as the balance sheet channel. The authors argue that flexible inflation targeting is the best policy framework for achieving both price stability and financial stability. This approach allows central banks to respond to inflationary or deflationary pressures without directly targeting asset prices, which can be difficult to assess. The paper also explores the effects of asset price bubbles on the economy under different monetary policy rules. It finds that policies focused on stabilizing inflation are more effective at moderating the disruptive effects of asset market disturbances. The authors conclude that monetary policy should focus on macroeconomic fundamentals rather than asset prices, as targeting asset prices can be destabilizing. They emphasize the importance of flexible inflation targeting in maintaining economic stability.