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Has Monetary Policy Reacted to Asset Price Movements? Evidence from the UK

  • Alexandros Kontonikas

    (Department of Economics and Finance, Brunel University, Uxbridge, United Kingdom)

  • Alberto Montagnoli

    (Department of Economics and Finance, Brunel University, Uxbridge, United Kingdom)

This paper examines the relationship between monetary policy and asset prices in the context of empirical policy rules. We begin our analysis by establishing the forecasting ability of house and stock price changes with respect to future aggregate demand. We then report estimates of monetary policy reaction functions for the United Kingdom over the period 1992-2003. UK policymakers appear to take into account the effect of asset price inflation when setting interest rates with a higher weight being assigned to property market fluctuations. Asset inflation-augmented rules describe more accurately actual policy, and the results are robust to modelling the effect of the Bank of England independence.

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Article provided by Cyprus Economic Society and University of Cyprus in its journal Ekonomia.

Volume (Year): 7 (2004)
Issue (Month): 1 (Summer)
Pages: 18-33

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Handle: RePEc:ekn:ekonom:v:7:y:2004:i:1:p:18-33
Contact details of provider: Web page: http://www.ekonomia.ucy.ac.cy/

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