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The Impact of Asset Prices and their Information Value for Monetary Policy

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  • DAVID MAYES
  • MATTI VIRÉN

Abstract

In this paper we explore the contribution that assetprices appear to make to fluctuations in the economyand to inflation, and hence to monetary policy,using a large international panel for the 1970-2008period. We show that house prices are importantin the determination of economic activity, andtherefore to monetary policy, but that stock marketprices, while offering information in many periods,form a rather weaker and less well determined linkage.Moreover, the effects are asymmetric over thecourse of the economic cycle. Using an augmentedTaylor rule, we go on to show that monetary policyhas not reacted much to asset prices but that longruninterest rates are clearly affected by house priceinflation. Relationships tend to be weaker in recentyears, probably as a result of greater stability in outputgrowth and inflation. Nevertheless, our resultssuggest that central banks would do well to considerasset prices in deciding monetary policy.

Suggested Citation

  • David Mayes & Matti Virén, 2010. "The Impact of Asset Prices and their Information Value for Monetary Policy," Revista ESPE - Ensayos Sobre Política Económica, Banco de la República, vol. 28(61), pages 134-167, August.
    • Handle: RePEc:col:000107:008322
    DOI: 10.32468/Espe.6104
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    More about this item

    Keywords

    monetary policy; risk premiumshocks; exchange rate pass-through; structuralVAR; sign restriction.;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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