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Monetary policy, investment and non-fundamental shocks

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  • Fernando Alexandre

Abstract

Using a sticky price model with endogenous investment and adjustment costs we analyse the benefits of monetary policy reacting to asset prices, when investment is under the influence of a non-fundamental shock, both for inflation-forecast targeting rules and for Taylor rules. We conclude that in this context there are benefits from reacting to asset prices that result from a more stable output gap, which is the consequence of a much lower volatility in firms’ investment. However, welfare gains depend on the source of asset price movements. Reacting to asset prices when there is a non-fundamental shock to investment stabilises both the asset price and inflation.

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2003 with number 296.

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Date of creation: 01 Aug 2003
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Handle: RePEc:sce:scecf3:296

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Keywords: Asset Prices; Inflation Targeting; Taylor Rule; Rational Expectations;

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References

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  2. Woodford, Michael, 1999. "Optimal Monetary Policy Inertia," Manchester School, University of Manchester, vol. 67(0), pages 1-35, Supplemen.
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Cited by:
  1. Balazs Egert & Ronald MacDonald, 2006. "Monetary Transmission Mechanism in Transition Economies: Surveying the Surveyable," CESifo Working Paper Series 1739, CESifo Group Munich.
  2. Fabrizio Coricelli & Balázs Égert & Ronald MacDonald, 2006. "Monetary Transmission Mechanism in Central & Eastern Europe: Gliding on a Wind of Change," William Davidson Institute Working Papers Series wp850, William Davidson Institute at the University of Michigan.
  3. Fabrizio Coricelli & Balázs Égert & Ronald MacDonald, 2006. "Monetary Transmission in Central and Eastern Europe: Gliding on a Wind of Change," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1.
  4. Coricelli, Fabrizio & Égert, Balázs & MacDonald, Ronald, 2006. "Monetary transmission mechanism in Central and Eastern Europe: Gliding on a wind of change," BOFIT Discussion Papers 8/2006, Bank of Finland, Institute for Economies in Transition.

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