Fundamental Paper Wealth and Monetary Policy
AbstractThis paper articulates three insights regarding asset prices and monetary policy: (1) Asset price appreciation due to monetary expansion, despite its “paper” wealth nature, tends to make current consumers as a whole wealthier; (2) the wealth effect of monetary policy (on consumption) is negatively correlated with Tobin’s q effect (on investment), which positively depends on investment elasticity; and (3) the soundness of asset market performances does not depend on whether they are fundamental or not, but on their compatibility with the AD-AS balance in the long run. These basic insights and their implications reveal some limitations of monetary policy as a stabilization policy, clarify some misperceptions on fundamental asset prices, and provide a rationale for monetary policy to react directly to asset market performances.
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Bibliographic InfoPaper provided by EconWPA in its series Macroeconomics with number 0309001.
Length: 46 pages
Date of creation: 01 Sep 2003
Date of revision:
Note: Type of Document - pdf; prepared on pc; to print on HP/PostScript/Franciscan monk; pages: 46; figures: included
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Fundamental Paper Wealth; Wealth Effect; Bubbles; Monetary Policy;
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-09-08 (All new papers)
- NEP-MAC-2003-09-08 (Macroeconomics)
- NEP-MON-2003-09-08 (Monetary Economics)
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