ABSTRACT
Theway economists conceive the pricemechanismof assets has a definite influence on the way they position themselves in the previous debates, and on their view regarding the role of a central bank. To clearly seewhy, and to get additional insight about the role of asset prices for central banking, the present chapter narrows the discussion to the theories of asset prices that underlie two previous competing views, and shows the consequences of each theory in terms of central bank policy. It is argued that it is possible to classify all the immense1 literature regarding asset pricing into three categories: the rational approach, the irrational approach, and the convention approach. The chapter shows that the irrational and convention approaches share some commonalities, and are, at least in part, an extension of Keynes’s liquidity preference theory. Each section starts with a presentation of the basic concepts and hypotheses of each approach.
