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Asset Prices, Output And Monetary Policy In A Small Open Economy

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  • Christopher Malikane
  • Willi Semmler

Abstract

We formulate a macro‐model of a small open economy in order to investigate the relative performance of rules that respond to asset prices and those that do not. Our model consists of three asset prices: the stock price, the long‐term interest rate and the exchange rate. These asset prices interact with nominal wage and price Phillips curves, a law of motion for the labour share, a dynamic IS curve that describes output adjustment and a Taylor‐type interest rate policy rule. Estimations of the model show that policy rules that respond to asset price movements dominate rules that do not.

Suggested Citation

  • Christopher Malikane & Willi Semmler, 2008. "Asset Prices, Output And Monetary Policy In A Small Open Economy," Metroeconomica, Wiley Blackwell, vol. 59(4), pages 666-686, November.
    • Handle: RePEc:bla:metroe:v:59:y:2008:i:4:p:666-686
    DOI: 10.1111/j.1467-999X.2008.00340.x
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    3. Muhammad Ali Nasir & Junjie Wu & Milton Yago & Alaa M. Soliman, 2016. "Macroeconomic policy interaction: State dependency and implications for financial stability in UK: A systemic review," Cogent Business & Management, Taylor & Francis Journals, vol. 3(1), pages 1154283-115, December.
    4. Niehof, Britta & Hayo, Bernd, 2014. "Analysis of Monetary Policy Responses after Financial Market Crises in a Continuous Time New Keynesian Model," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100410, Verein für Socialpolitik / German Economic Association.
    5. Bernd Hayo & Britta Niehof, 2013. "Studying International Spillovers in a New Keynesian Continuous Time Framework with Financial Markets," MAGKS Papers on Economics 201342, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    6. Arslan Razmi, 2018. "Does the demand regime matter over the medium run? Revisiting distributional issues in a portfolio framework under different exchange rate regimes," Metroeconomica, Wiley Blackwell, vol. 69(4), pages 708-736, November.
    7. Muhammad Ali Nasir & Alaa M. Soliman & Milton Yago & Junjie Wu, 2016. "Macroeconomic Policies Interaction & the Symmetry of Financial Markets’ Responses," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 5(1), pages 53-69.
    8. Muhammad Ali Nasir & Alaa M. Soliman, 2014. "Aspects of Macroeconomic Policy Combinations and Their Effects on Financial Markets," Economic Issues Journal Articles, Economic Issues, vol. 19(1), pages 95-118, March.

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