Ben Bernanke and Mark Gertler explore the implications of asset price volatility for monetary policy. They argue that central banks should focus on underlying inflationary pressures rather than asset prices, as the latter can be influenced by non-fundamental factors and may have undesirable side effects. The authors base their conclusions on simulations of different policy rules in a small-scale macroeconomic model and a comparative analysis of U.S. and Japanese monetary policy. They conclude that a regime of flexible inflation targeting, either implicit or explicit, is the best approach to achieving both price stability and financial stability. This approach involves actively adjusting monetary policy to offset incipient inflationary or deflationary pressures, without responding directly to changes in asset prices. The authors also discuss the potential risks of attempting to stabilize asset prices, such as the risk of creating a panic once a bubble bursts.Ben Bernanke and Mark Gertler explore the implications of asset price volatility for monetary policy. They argue that central banks should focus on underlying inflationary pressures rather than asset prices, as the latter can be influenced by non-fundamental factors and may have undesirable side effects. The authors base their conclusions on simulations of different policy rules in a small-scale macroeconomic model and a comparative analysis of U.S. and Japanese monetary policy. They conclude that a regime of flexible inflation targeting, either implicit or explicit, is the best approach to achieving both price stability and financial stability. This approach involves actively adjusting monetary policy to offset incipient inflationary or deflationary pressures, without responding directly to changes in asset prices. The authors also discuss the potential risks of attempting to stabilize asset prices, such as the risk of creating a panic once a bubble bursts.