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Monetary policy and asset prices: to respond or not?

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  • Q. Farooq Akram

    (Norges Bank, Norway)

  • Gunnar Bärdsen
  • Øyvind Eitrheim

    (Norges Bank, Norway)

Abstract

We investigate whether there is a case for asset prices in interest rates rules within a small econometric model of the Norwegian economy, modelling the interdependence of the real economy, credit and three classes of asset prices: housing prices, equity prices and the nominal exchange rate. We compare the performance of simple interest rate rules that allow for additional response to movements in asset prices to the performance of more standard monetary policy rules. We find that including housing and|or equity prices in the policy rules improve macroeconomic performance in terms of both nominal and real economic stability. In contrast, responding to exchange rate fluctuations seems less effective to this end, mainly because the instrument must be used quite actively, which contributes to higher volatility in general. Copyright © 2006 John Wiley & Sons, Ltd.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 11 (2006)
Issue (Month): 3 ()
Pages: 279-292

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Handle: RePEc:ijf:ijfiec:v:11:y:2006:i:3:p:279-292

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Cited by:
  1. Lee, Dong Jin & Son, Jong Chil, 2013. "Nonlinearity and structural breaks in monetary policy rules with stock prices," Economic Modelling, Elsevier, vol. 31(C), pages 1-11.
  2. Akram, Q. Farooq & Nymoen, Ragnar, 2007. "Model selection for monetary policy analysis How important is empirical validity?," Memorandum 14/2007, Oslo University, Department of Economics.
  3. Gunnar Bardsen & Kjersti-Gro Lindquist & Dimitrios P.Tsomocos, 2006. "Evaluation of macroeconomic models for financial stability analysis," OFRC Working Papers Series 2006fe01, Oxford Financial Research Centre.
  4. Anundsen, André K. & Jansen, Eilev S., 2013. "Self-reinforcing effects between housing prices and credit," Journal of Housing Economics, Elsevier, Elsevier, vol. 22(3), pages 192-212.
  5. Lichao Cheng & Yi Jin & Zhixiong Zeng, 2011. "Asset Prices, Monetary Policy, and Aggregate Fluctuations: An Empirical Investigation," Monash Economics Working Papers 13-11, Monash University, Department of Economics.
  6. Gurdgiev, Constantin T., 2006. "Owner-occupied housing in a model of exchange rate determination," Journal of Housing Economics, Elsevier, Elsevier, vol. 15(3), pages 217-229, September.
  7. Pierre-Richard Agénor & Koray Alper & Luiz Pereira da Silva, 2011. "Capital Regulation, Monetary Policy and Financial Stability," Centre for Growth and Business Cycle Research Discussion Paper Series 154, Economics, The Univeristy of Manchester.
  8. Hilde C. Bjørnland, 2005. "Monetary policy and exchange rate interactions in a small open economy," Working Paper, Norges Bank 2005/16, Norges Bank.
  9. Roger Hammersland & Dag Henning Jacobsen, 2008. "The Financial Accelerator: Evidence using a procedure of Structural Model Design," Discussion Papers, Research Department of Statistics Norway 569, Research Department of Statistics Norway.
  10. Q. Farooq Akram & Ragnar Nymoen, 2006. "Model selection for monetary policy analysis – Importance of empirical validity," Working Paper, Norges Bank 2006/13, Norges Bank.
  11. Francesco Furlanetto, 2011. "Does Monetary Policy React to Asset Prices? Some International Evidence," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 7(3), pages 91-111, September.
  12. Q. Farooq Akram & Yakov Ben-Haim & Øyvind Eitrheim, 2006. "Managing uncertainty through robust-satisficing monetary policy," Working Paper, Norges Bank 2006/10, Norges Bank.

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