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What Asset Prices Should be Targeted by a Central Bank?

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  • Kengo Nutahara

Abstract

This 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 Info

Paper provided by The Canon Institute for Global Studies in its series CIGS Working Paper Series with number 13-004E.

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Length: 29
Date of creation: Aug 2013
Date of revision:
Handle: RePEc:cnn:wpaper:13-004e

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  1. Charles T. Carlstrom & Timothy S. Fuerst, 2004. "Asset prices, nominal rigidities, and monetary policy," Working Paper 0413, Federal Reserve Bank of Cleveland.
  2. Carlstrom, Charles T. & Fuerst, Timothy S., 2005. "Investment and interest rate policy: a discrete time analysis," Journal of Economic Theory, Elsevier, vol. 123(1), pages 4-20, July.
  3. 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.
  4. Gilchrist, Simon & Leahy, John V., 2002. "Monetary policy and asset prices," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 75-97, January.
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