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

  • Christopher Malikane
  • Willi Semmler

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. Copyright � 2008 The Authors. Journal compilation � 2008 Blackwell Publishing Ltd.

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Article provided by Wiley Blackwell in its journal Metroeconomica.

Volume (Year): 59 (2008)
Issue (Month): 4 (November)
Pages: 666-686

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Handle: RePEc:bla:metroe:v:59:y:2008:i:4:p:666-686
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  1. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper 0107, Federal Reserve Bank of Cleveland.
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