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Determinacy, stock market dynamics and monetary policy inertia

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  • Pfajfar, Damjan
  • Santoro, Emiliano

Abstract

We study equilibrium determinacy in a New-Keynesian model where the Central Bank responds to asset prices growth. Unlike Taylor-type rules that react to asset prices, the proposed alternative does not harm dynamic stability and in certain cases promotes determinacy by inducing interest-rate inertia.

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Bibliographic Info

Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 112 (2011)
Issue (Month): 1 (July)
Pages: 7-10

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Handle: RePEc:eee:ecolet:v:112:y:2011:i:1:p:7-10

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Web page: http://www.elsevier.com/locate/ecolet

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Keywords: Asset prices Determinacy Monetary policy inertia;

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References

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  5. Charles T. Carlstrom & Timothy S. Fuerst, 2004. "Asset prices, nominal rigidities, and monetary policy," Working Paper 0413, Federal Reserve Bank of Cleveland.
  6. Pfajfar, D. & Santoro, E., 2008. "Credit Market Distortions, Asset Prices and Monetary Policy," Cambridge Working Papers in Economics 0825, Faculty of Economics, University of Cambridge.
  7. Julio J. Rotemberg & Michael Woodford, 1998. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy: Expanded Version," NBER Technical Working Papers 0233, National Bureau of Economic Research, Inc.
  8. Bullard, James & Mitra, Kaushik, 2002. "Learning about monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1105-1129, September.
  9. Michael Woodford, 2001. "The Taylor Rule and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 91(2), pages 232-237, May.
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  11. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
  12. Michael Woodford, 2003. "Optimal Interest-Rate Smoothing," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 861-886.
  13. James Bullard & Kaushik Mitra, 2003. "Determinacy, learnability, and monetary policy inertia," Working Papers 2000-030, Federal Reserve Bank of St. Louis.
  14. Woodford, Michael, 1999. "Optimal monetary policy inertia," CFS Working Paper Series 1999/09, Center for Financial Studies (CFS).
  15. Glenn D. Rudebusch, 2005. "Monetary policy inertia: fact or fiction?," Working Paper Series 2005-19, Federal Reserve Bank of San Francisco.
  16. James B. Bullard & Eric Schaling, 2002. "Why the Fed should ignore the stock market," Review, Federal Reserve Bank of St. Louis, issue Mar., pages 35-42.
  17. Ben Bernanke & Mark Gertler, 1999. "Monetary policy and asset price volatility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 77-128.
  18. Glenn D. Rudebusch, 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Working Papers in Applied Economic Theory 95-02, Federal Reserve Bank of San Francisco.
  19. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  20. Giorgio Di Giorgio & Salvatore Nistico, 2007. "Monetary Policy and Stock Prices in an Open Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(8), pages 1947-1985, December.
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Cited by:
  1. Airaudo, Marco, 2013. "Monetary policy and stock price dynamics with limited asset market participation," Journal of Macroeconomics, Elsevier, vol. 36(C), pages 1-22.
  2. Ravn, Søren Hove, 2014. "Asymmetric monetary policy towards the stock market: A DSGE approach," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 24-41.
  3. Pfajfar, D. & Santoro, E., 2008. "Credit Market Distortions, Asset Prices and Monetary Policy," Cambridge Working Papers in Economics 0825, Faculty of Economics, University of Cambridge.
  4. Airaudo, Marco, 2013. "Monetary policy, stock prices, and consumption externalities," Economics Letters, Elsevier, vol. 120(3), pages 537-541.
  5. Airaudo, Marco & Cardani, Roberta & Lansing, Kevin J., 2013. "Monetary policy and asset prices with belief-driven fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1453-1478.

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