Investment and Non-fundamental Movements in Asset Prices: is there a role for monetary policy?
AbstractThe role of monetary policy during periods of asset price volatility has been the subject of discussion among economists and policymakers at least since the 1920s and the Great Depression that followed. Some economists have been arguing that the performance of inflation-targeting central banks can be improved by reacting to misalignments in asset prices, because these may result in distortions in consumption and investment decisions. Using a sticky price model with endogenous investment driven by non-fundamental movements in asset prices, we discuss the potential benefits, in terms of output and inflation stabilisation, of monetary policy reacting to asset prices over and above the deviation of the inflation forecast from the target. We show that identifying the source of asset price movements is crucial to welfare gains.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Economic Issues in its journal Economic Issues.
Volume (Year): 11 (2006)
Issue (Month): 1 (March)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bill Dupor & Timothy Conley, 2004. "The Fed Response to Equity Prices and Inflation," American Economic Review, American Economic Association, vol. 94(2), pages 24-28, May.
- Pedro Bacao & Fernando Alexandre, 2003.
"Equity Prices and Monetary Policy: An Overview with an Exploratory Model,"
Computing in Economics and Finance 2003
290, Society for Computational Economics.
- Fernando Alexandre & Pedro Bação, 2002. "Equitity prices and Monetary Policy: An Overview with an Exploratory Model," NIPE Working Papers 1/2002, NIPE - Universidade do Minho.
- Alexandre, Fernando & Bacao, Pedro, 2005. "Monetary policy, asset prices, and uncertainty," Economics Letters, Elsevier, vol. 86(1), pages 37-42, January.
- Miguel Casares & Bennett T. McCallum, 2000.
"An Optimizing IS-LM Framework with Endogenous Investment,"
NBER Working Papers
7908, National Bureau of Economic Research, Inc.
- Casares, Miguel & McCallum, Bennett T., 2006. "An optimizing IS-LM framework with endogenous investment," Journal of Macroeconomics, Elsevier, vol. 28(4), pages 621-644, December.
- P Arestis & A Mihailov, 2009.
"Flexible Rules cum Constrained Discretion: A New Consensus in Monetary Policy,"
Economic Issues Journal Articles,
Economic Issues, vol. 14(2), pages 27-54, September.
- Philip Arestis & Alexander Mihailov, 2007. "Flexible Rules cum Constrained Discretion: A New Consensus in Monetary Policy," Economic Analysis Research Group Working Papers earg-wp2007-13, Henley Business School, Reading University.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dan Wheatley).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.