The International Monetary Fund last week gave central banks some wicked advice*. They should no longer ignore residential property prices when setting interest rates. At the same time, the IMF recommends central banks should retain their inflation-targeting frameworks. It all sounds very plausible. Unfortunately the two goals are inconsistent.

The reason why central bankers in the past refused to take explicit account of property and other asset prices is not accidental. The New Keynesian forecasting models, with which central banks predict future output and inflation, have no explicit role for money, financial markets and asset prices. The way modern central banks deal with asset price bubbles is to do nothing until they burst and then clean up the mess. For the New Keynesian framework to work well, a narrow inflation measure is not a design error. It is essential.