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The Impact of Asset Prices and Their Information Value for Monetary Policy11David Mayes is director, Europe Institute, University of Auckland, private bag 92019, Auckland 1142, New Zealand: e-mail: d.mayes@auckland.ac.nz. Matti Virén is professor of economics at the University of Turku and a scientific advisor with the Bank of Finland, PO Box 160, 00101 Helsinki, Finland, e-mail: matti.viren@bof.fi. The views expressed in this paper are those of the authors and do not necessarily coincide with any that may be held by the Bank of Finland. An earlier version of this paper was presented at the North American Economics and Finance Association session in memory of Chris Paraskevopoulos, in Hawaii on July 1, 2008. We are grateful for helpful comments from George Kaufman

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  • Mayes, David
  • Virén, Matti

Abstract

Using panel data for the EU and Norway since 1970, we explore the contribution that asset prices appear to make to fluctuations in the economy, to inflation and hence to monetary policy. House prices are important in economic activity and monetary policy, but stock market prices form a weaker and less well-determined linkage, particularly since the formation of the euro area. The effects are asymmetric over the economic cycle. Using an augmented Taylor rule we show that monetary policy has not reacted much to asset prices, but long-run interest rates are clearly affected by house price inflation. Central banks could consider asset prices in deciding monetary policy.

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  • Mayes, David & Virén, Matti, 2008. "The Impact of Asset Prices and Their Information Value for Monetary Policy11David Mayes is director, Europe Institute, University of Auckland, private bag 92019, Auckland 1142, New Zealand: e-mail: d.," The Journal of Economic Asymmetries, Elsevier, vol. 5(2), pages 1-26.
    • Handle: RePEc:eee:joecas:v:5:y:2008:i:2:p:1-26
    DOI: 10.1016/j.jeca.2008.02.001
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    More about this item

    Keywords

    E21; E31; E32; E43; E52; Asset prices; Monetary policy; European Union; House prices; Stock prices;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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