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Equitity prices and Monetary Policy: An Overview with an Exploratory Model

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Author Info
Fernando Alexandre () (Universidade do Minho - NIPE and Birkbeck College)
Pedro Bação () (Birkbeck College and Universidade de Coimbra)

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Abstract

Financial stability, with an emphasis on the relevance of asset prices stability to the stability of the overall economy, has become the sub ject of wide discussion among monetary authorities. Closely related to these issues are the concerns of central bankers with a bubble economy and its aftermath. After briefly surveying the potential links between financial markets and the real economy and its implications for the design of monetary policy, we illustrate some of the issues in this literature through the analysis of a simple linear rational expectations model. From this exercise we conclude that the benefits of reacting to asset prices depend crucially on the kind of shock hitting the economy. Ideally, reacting to the misalignment of equity prices is desirable. However, the presence of uncertainty in the estimation of the variables to which the policy rule responds may overturn this conclusion.

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Paper provided by NIPE - Universidade do Minho in its series NIPE Working Papers with number 1/2002.

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Date of creation: 2002
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Handle: RePEc:nip:nipewp:1/2002

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Keywords: Asset Prices Inflation Targeting Taylor Rule Rational Expectations Uncertainty.

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Luís, Pacheco, 2004. "Asset Prices and Monetary Policy in the Euro Area: a tentative model," MPRA Paper 6579, University Library of Munich, Germany. [Downloadable!]
  2. Fernando Alexandre, 2002. "Monetary Policy, Investment and Non-Fundamental Shocks," NIPE Working Papers 6/2002, NIPE - Universidade do Minho. [Downloadable!]
    Other versions:
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