Monetary policy is ultimately all about expectations. As Nick Rowe from Worthwhile Canadian Initiative points out, this feature of monetary policy makes the idea of “targeting asset prices” difficult – and ensures that any attempt to pop bubbles will be difficult, even if the bubbles are observable (which most of the time they are not):
Let’s imagine a conversation that might take place in the future, under a different monetary policy regime, where central banks try to target house prices.
“Should we buy that house? The price does seem rather high, compared to everything else. You don’t think it might be a bubble, like in the 2000’s?”
“No, it can’t be a bubble, because the central bank assured us its new monetary policy would prevent house price bubbles. And in any case, (the relative price of) everything else … seems to be falling … so the only safe investment seems to be in houses. If we don’t get into the housing market now, our savings will keep on depreciating, and we never will be able to afford to buy a house.”
Effectively, by saying that they will control asset prices (and being credible) they convince people that current house prices are at a fundamentally sound level. This does not prevent the existence of multiple equilibrium for house prices, and if anything it may help to drive house prices to other equilibrium by increasing the confidence that “this is not a bubble”.