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Asset Prices, Nominal Rigidities, and Monetary Policy

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Author Info

  • Charles T. Carlstrom

    (Federal Reserve bank of Cleveland)

  • Timothy Fuerst

    (Bowling Green State University)

Abstract

Should monetary policy respond to asset prices? This paper analyzes this question from the vantage point of equilibrium determinacy. A central bank responding to asset prices is indirectly responding to firm profits. In a model with sticky prices, increases in inflation tend to lower firm profits so that a central bank responding to share prices implicitly weakens its overall response to inflation. This is the novel source of equilibrium indeterminacy highlighted in the paper. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2006.11.005
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 10 (2007)
Issue (Month): 2 (April)
Pages: 256-275

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Handle: RePEc:red:issued:05-36

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Related research

Keywords: Monetary policy; Equilibrium determinacy; Interest rate rules;

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References

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  1. Uribe, Martin, 2003. "Real exchange rate targeting and macroeconomic instability," Journal of International Economics, Elsevier, vol. 59(1), pages 137-159, January.
  2. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1996. "Sticky price and limited participation models of money: a comparison," Staff Report 227, Federal Reserve Bank of Minneapolis.
  3. Benhabib, Jess & Schmitt-Grohé, Stephanie & Uribe, Martín, 1999. "Monetary Policy and Multiple Equilibria," CEPR Discussion Papers 2316, C.E.P.R. Discussion Papers.
  4. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February.
  5. Ben S. Bernanke & Michael Woodford, 1997. "Inflation forecasts and monetary policy," Proceedings, Federal Reserve Bank of Cleveland, pages 653-686.
  6. Clarida, R. & Gali, J. & Gertler, M., 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Working Papers 99-13, C.V. Starr Center for Applied Economics, New York University.
  7. Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers 98-03, C.V. Starr Center for Applied Economics, New York University.
  8. Ben S. Bernanke & Mark Gertler, 2001. "Should Central Banks Respond to Movements in Asset Prices?," American Economic Review, American Economic Association, vol. 91(2), pages 253-257, May.
  9. FFF1Alexander A. NNN1Weinreb, 2003. "Change and instability," Demographic Research Special Collections, Max Planck Institute for Demographic Research, Rostock, Germany, vol. 1(12), pages 373-396, September.
  10. Charles T. Carlstrom & Timothy S. Fuerst, 2003. "Investment and interest rate policy: a discrete time analysis," Working Paper 0320, Federal Reserve Bank of Cleveland.
  11. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
  12. Charles T. Carlstrom & Timothy S. Fuerst, 2001. "Timing and real indeterminacy in monetary models," Working Paper 9910R, Federal Reserve Bank of Cleveland.
  13. Kaushik Mitra & James Bullard, . "Learning About Monetary Policy Rules," Discussion Papers 00/41, Department of Economics, University of York.
  14. William Kerr & Robert G. King, 1996. "Limits on interest rate rules in the IS model," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 47-75.
  15. Charles T. Carlstrom & Timothy S. Fuerst, 2001. "Real indeterminacy in monetary models with nominal interest rate distortions: the problem with inflation targets," Working Paper 9818R, Federal Reserve Bank of Cleveland.
  16. Amato, Jeffery D. & Laubach, Thomas, 2003. "Estimation and control of an optimization-based model with sticky prices and wages," Journal of Economic Dynamics and Control, Elsevier, vol. 27(7), pages 1181-1215, May.
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