Working Paper 17-05 - Monetary Policy, Asset Prices and Economic Growth in the World Economy over the 1995-2004 Period : A counterfactual simulation with the NIME Model
Over the 1995-2004 period, the evolution of stock market indices in the United States and Europe exhibited a distinct boom-and-bust pattern, rising dramatically during the second half of the 1990s and falling sharply at the turn of the century. These changes in asset prices affected household wealth and the financing cost of investments, so that the period of rising asset prices was also characterised by strong economic growth, while the period of falling asset prices saw weaker growth. As equity markets were largely driven by “irrational exuberance” in the second half of the 1990s, it is sometimes argued that, in order to foster a more balanced growth path, the monetary authorities in the United States and the euro area should have targeted changes in a price index which not only includes contemporaneous consumer prices but also asset prices.In this Working Paper we assess the worldwide macroeconomic implications of an interest rate rule whereby the major central banks of the world target not only changes in the traditional consumer price index but also changes in asset prices. We do this by simulating the nime model over the 1995-2004 period with an interest rate rule similar to the well-known Taylor rule, but augmented for changes in asset prices.
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Paper provided by Federal Planning Bureau, Belgium in its series Working Papers with number
0517.
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Find related papers by JEL classification: F2 - International Economics - - International Factor Movements and International Business C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit C5 - Mathematical and Quantitative Methods - - Econometric Modeling