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Monetary policy and asset prices: To respond or not?

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Author Info
Q. Farook Akram () (Norges Bank (Central Bank of Norway))
Gunnar Bårdsen () (Norges Bank (Central Bank of Norway))
Øyvind Eitrheim () (Norges Bank (Central Bank of Norway))

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Abstract

We investigate whether there is a case for asset prices in interest rates rules within a small econometric model of the Norwegian economy, modeling the interdependence of the real economy, credit and three classes of assets prices: housing prices, equity prices and the nominal exchange rate. We compare the performance of simple and efficient interest rate rules that allow for response to movements in asset prices to the performance of more standard monetary policy rules. We find that including housing prices and equity prices in the policy rules can improve macroeconomic performance in terms of both nominal and real economic stability. In contrast, a response to nominal exchange rate fluctuations can induce excess volatility in general and prove detrimental to macroeconomic stability.

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File URL: http://www.norges-bank.no/upload/import/publikasjoner/arbeidsnotater/pdf/arb-2005-09.pdf
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Publisher Info
Paper provided by Norges Bank in its series Working Paper with number 2005/9.

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Length: 28 pages
Date of creation: 03 Oct 2005
Date of revision:
Handle: RePEc:bno:worpap:2005_09

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Related research
Keywords: Monetary policy; asset prices; simple interest rate rules; econometric model;

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Find related papers by JEL classification:
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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References listed on IDEAS
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.:
  1. Svensson, Lars E. O., 2000. "Open-economy inflation targeting," Journal of International Economics, Elsevier, vol. 50(1), pages 155-183, February. [Downloadable!] (restricted)
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  2. Rudebusch, Glenn D, 2005. "Assessing the Lucas Critique in Monetary Policy Models," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(2), pages 245-72, April.
    Other versions:
  3. David G. Blanchflower & Andrew J. Oswald, 1990. "The Wage Curve," NBER Working Papers 3181, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Jagjit S. Chadha & Lucio Sarno & Giorgio Valente, 2004. " Monetary Policy Rules, Asset Prices and Exchange Rates," CDMA Working Paper Series 0403, Centre for Dynamic Macroeconomic Analysis. [Downloadable!]
    Other versions:
  5. 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. [Downloadable!] (restricted)
  6. Akram, Q. Farooq, 2006. "PPP in the medium run: The case of Norway," Journal of Macroeconomics, Elsevier, vol. 28(4), pages 700-719, December. [Downloadable!] (restricted)
  7. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-48, April.
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  8. Andrew G. Haldane & Nicoletta Batini, 1998. "Forward-Looking Rules for Monetary Policy," NBER Working Papers 6543, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Gunnar Bardsen & Eilev S. Jansen & Ragnar Nymoen, 2004. "Econometric Evaluation of the New Keynesian Phillips Curve," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 66(s1), pages 671-686, 09. [Downloadable!] (restricted)
  10. Charles Bean, 2003. "Asset Prices, Financial Imbalances and Monetary Policy: Are Inflation Targets Enough?," RBA Annual Conference Volume, in: Anthony Richards & Tim Robinson (ed.), Asset Prices and Monetary Policy Reserve Bank of Australia. [Downloadable!]
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  11. Gunnar Bårdsen, 2005. "Stylized dynamic model representations - a note," Working Paper Series 6305, Department of Economics, Norwegian University of Science and Technology. [Downloadable!]
  12. Gunnar Bardsen & Eilev S. Jansen & Ragnar Nymoen, 2003. "Econometric inflation targeting," Econometrics Journal, Royal Economic Society, vol. 6(2), pages 430-461, December. [Downloadable!] (restricted)
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  13. Michael D. Bordo & Olivier Jeanne, 2002. "Boom-Busts in Asset Prices, Economic Instability, and Monetary Policy," NBER Working Papers 8966, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  14. Orphanides, Athanasios, 2003. "The quest for prosperity without inflation," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 633-663, April. [Downloadable!] (restricted)
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  15. Carl Walsh, 2003. "Speed Limit Policies: The Output Gap and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 93(1), pages 265-278, March. [Downloadable!]
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Full references

Cited by:
(explanations, 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.)

  1. Q. Farooq Akram & Yakov Ben-Haim & Øyvind Eitrheim, 2006. "Managing uncertainty through robust-satisficing monetary policy," Working Paper 2006/10, Norges Bank. [Downloadable!]
  2. Gunnar Bårdsen & Kjersti-Gro Lindquist & Dimitrios P. Tsomocos, 2006. "Evaluation of macroeconomic models for financial stability analysis," Working Paper Series 6806, Department of Economics, Norwegian University of Science and Technology. [Downloadable!]
    Other versions:
  3. 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. [Downloadable!]
    Other versions:
  4. Q. Farooq Akram & Ragnar Nymoen, 2006. "Model selection for monetary policy analysis – Importance of empirical validity," Working Paper 2006/13, Norges Bank. [Downloadable!]
  5. Bjørnland, Hilde C., 2005. "Monetary policy and exchange rate interactions in a small open economy," Memorandum 31/2005, Oslo University, Department of Economics. [Downloadable!]
    Other versions:
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