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Wealth Effects and Monetary Policy

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  • I. Arnold
  • P.J.A. van Els
  • J. de Haan

Abstract

This paper explores the importance of wealth effects for monetary policy in the context of the policy strategy of the European Central Bank (ECB). Causality tests indicate that nominal equity prices have predictive power for ECB policy indicators of real activity, while housing prices have predictive power for price indicators, and money and credit aggregates. This means that, at least indirectly, monetary policy takes asset price developments into account. The results, however, point to strong differences among individual euro area countries. On the question of whether or not a central bank should explicitly target asset prices directly or through the inclusion of asset prices in its measure of inflation, counterfactual model simulations suggest that this would not have led to a significantly different macroeconomic performance in the euro area.

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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series WO Research Memoranda (discontinued) with number 719.

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Date of creation: 2002
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Handle: RePEc:dnb:wormem:719

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Keywords: Wealth effects; asset prices; monetary policy;

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Cited by:
  1. Jiri Slacalek, 2006. "What Drives Personal Consumption?: The Role of Housing and Financial Wealth," Discussion Papers of DIW Berlin 647, DIW Berlin, German Institute for Economic Research.
  2. Massimo Giuliodori, 2004. "Monetary Policy Shocks and the Role of House Prices Across European Countries," DNB Working Papers 015, Netherlands Central Bank, Research Department.

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