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The Transmission Mechanism and the Role of Asset Prices in Monetary Policy

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  • Frederic S. Mishkin

Abstract

This paper surveys the transmission mechanisms of monetary policy beyond the standard interest rate channel by focusing on how monetary policy affects the economy through other asset prices. It outlines how the monetary transmission mechanisms operating through stock prices, real estate prices, and exchange rates affect which affect investment and consumption decisions of both firms and households. Given the role that asset prices play on the transmission mechanism, central banks have been often tempted to use them as targets of monetary policy. This paper shows that despite the significance of asset prices in the conduct of monetary policy, targeting asset prices by central banks is likely to lead to worse economic outcomes and might even erode the support for their independence.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8617.

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Date of creation: Dec 2001
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Publication status: published as Aspects of the Transmission Mechanism of Monetary Policy, Focus on Austria 3-4/2001. Osterreichische Nationalbank: Vienna 2001.
Handle: RePEc:nbr:nberwo:8617

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  1. R. Glenn Hubbard, 1994. "Is There a `Credit Channel' for Monetary Policy?," NBER Working Papers 4977, National Bureau of Economic Research, Inc.
  2. Gertler, M. & Gilchrist, S., 1993. "Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms," Working Papers, C.V. Starr Center for Applied Economics, New York University 93-02, C.V. Starr Center for Applied Economics, New York University.
  3. Aaron Drew & Adrian Orr, 1999. "The Reserve Bank's role in the recent business cycle: actions and evolutions," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, Reserve Bank of New Zealand, vol. 62, March.
  4. Anil Kashyap & Jeremy C. Stein, 1993. "Monetary Policy and Bank Lending," NBER Working Papers 4317, National Bureau of Economic Research, Inc.
  5. Frederic S. Mishkin, 2000. "International Experiences with Different Monetary Policy Regimes," NBER Working Papers 7044, National Bureau of Economic Research, Inc.
  6. Barry Bosworth, 1975. "The Stock Market and the Economy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(2), pages 527-300.
  7. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," NBER Working Papers 5146, National Bureau of Economic Research, Inc.
  8. Cecchetti, Stephen G. & Kashyap, Anil K, 1996. "International cycles," European Economic Review, Elsevier, Elsevier, vol. 40(2), pages 331-360, February.
  9. Fumio Hayashi, 1981. "Tobin's Marginal q and Average a : A Neoclassical Interpretation," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 457, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. Dr Don Brash., 2000. "Inflation targeting in New Zealand, 1988-2000," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, Reserve Bank of New Zealand, vol. 63, March.
  11. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, Elsevier, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
  12. Frederic S. Mishkin, 2000. "Lessons from the Asian Crisis," NBER Working Papers 7102, National Bureau of Economic Research, Inc.
  13. Frederic S. Mishkin, 2000. "Inflation Targeting in Emerging Market Countries," NBER Working Papers 7618, National Bureau of Economic Research, Inc.
  14. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 1(1), pages 15-29, February.
  15. Ben Bernanke & Mark Gertler, 1999. "Monetary policy and asset price volatility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 77-128.
  16. Mishkin, Frederic S. & Savastano, Miguel A., 2001. "Monetary policy strategies for Latin America," Journal of Development Economics, Elsevier, Elsevier, vol. 66(2), pages 415-444, December.
  17. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
  18. Mishkin, Frederic S, 1976. "Illiquidity, Consumer Durable Expenditure, and Monetary Policy," American Economic Review, American Economic Association, American Economic Association, vol. 66(4), pages 642-54, September.
  19. Stephen G. Cecchetti, 1995. "Distinguishing theories of the monetary transmission mechanism," Review, Federal Reserve Bank of St. Louis, issue May, pages 83-97.
  20. Jonathan McCarthy & Richard W. Peach, 2002. "Monetary policy transmission to residential investment," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue May, pages 139-158.
  21. Frederic S. Mishkin, 1996. "Understanding Financial Crises: A Developing Country Perspective," NBER Working Papers 5600, National Bureau of Economic Research, Inc.
  22. Frederic S. Mishkin & Adam S. Posen, 1997. "Inflation targeting: lessons from four countries," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Aug, pages 9-110.
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