What Asset Prices Should be Targeted by a Central Bank?
AbstractThis paper investigates the monetary policy design for restoring equilibrium determinacy. Our interests are whether a central bank should respond to asset price fluctuations, and if so, what asset prices should be targeted. We show that a monetary policy response to the price of a productive tangible asset (capital price) is helpful for equilibrium determinacy, while that to the price of an intangible asset that reflects a firms profit (share prices) is a source of equilibrium indeterminacy. This result comes from the two assets prices moving in opposite directions in response to a permanent increase in inflation.
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Bibliographic InfoPaper provided by The Canon Institute for Global Studies in its series CIGS Working Paper Series with number 13-004E.
Date of creation: Aug 2013
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-05-04 (All new papers)
- NEP-CBA-2014-05-04 (Central Banking)
- NEP-MAC-2014-05-04 (Macroeconomics)
- NEP-MON-2014-05-04 (Monetary Economics)
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