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Monetary policy and asset prices in an open economy

  • Ida, Daisuke
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    This paper examines whether central banks should respond to asset price fluctuations in a two-country sticky price model. We compare a monetary policy rule that targets both domestic asset prices and foreign asset prices with several alternative monetary policy rules. This paper shows that this policy rule can produce preferable outcomes because the domestic central bank incorporates important information that both domestic and foreign asset prices possess into its monetary policy. Our model suggests that central banks should consider both domestic and foreign asset prices in a two country framework with asset price fluctuations.

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    File URL: http://www.sciencedirect.com/science/article/pii/S1062940810000422
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    Article provided by Elsevier in its journal The North American Journal of Economics and Finance.

    Volume (Year): 22 (2011)
    Issue (Month): 2 (August)
    Pages: 102-117

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    Handle: RePEc:eee:ecofin:v:22:y:2011:i:2:p:102-117
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620163

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