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Monetary Policy Rules, Asset Prices and Exchange Rates

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  • Jagjit S. Chadha
  • Lucio Sarno

    ()

  • Giorgio Valente

    ()

Abstract

We examine empirically whether asset prices and exchange rates may be admitted into a standard interest rate rule, using data for the US, the UK and Japan since 1979. Asset prices and exchange rates can be employed as information variables for a standard ‘Taylor-type’ rule or as arguments in an augmented interest rate rule. Our empirical evidence, based on measures of the output gap proxied by marginal costs calculations, suggests that monetary policy-makers may use asset prices and exchange rates not only as part of their information set for setting interest rates, but also to set interest rates to offset deviations of asset prices or exchange rates from their equilibrium levels. These results are open to several alternative interpretations.

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Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 200403.

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Date of creation: 15 Oct 2004
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Handle: RePEc:san:cdmawp:0403

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Keywords: Asset prices; exchange rates; interest rate rules; monetary policy.;

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