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

Author

Listed:
  • Alexandros Kontonikas

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

  • Alberto Montagnoli

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

Abstract

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.

Suggested Citation

  • Alexandros Kontonikas & Alberto Montagnoli, 2004. "Has Monetary Policy Reacted to Asset Price Movements? Evidence from the UK," Ekonomia, Cyprus Economic Society and University of Cyprus, vol. 7(1), pages 18-33, Summer.
  • Handle: RePEc:ekn:ekonom:v:7:y:2004:i:1:p:18-33
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    Cited by:

    1. Kontonikas, Alexandros & Ioannidis, Christos, 2005. "Should monetary policy respond to asset price misalignments?," Economic Modelling, Elsevier, vol. 22(6), pages 1105-1121, December.
    2. Lichao Cheng & Yi Jin & Zhixiong Zeng, 2011. "Asset Prices, Monetary Policy, and Aggregate Fluctuations: An Empirical Investigation," Monash Economics Working Papers 13-11, Monash University, Department of Economics.
    3. Alexandros Kontonikas & Alberto Montagnoli, 2006. "Optimal Monetary Policy And Asset Price Misalignments," Scottish Journal of Political Economy, Scottish Economic Society, vol. 53(5), pages 636-654, November.
    4. Dirk Bleich & Ralf Fendel & Jan-Christoph Rülke, 2013. "Monetary Policy and Stock Market Volatility," Economics Bulletin, AccessEcon, vol. 33(3), pages 1669-1680.
    5. Alberto Montagnoli & Oreste Napolitano, 2004. "Financial Condition Index and interest rate settings: a comparative analysis," Money Macro and Finance (MMF) Research Group Conference 2004 1, Money Macro and Finance Research Group.
    6. Weida Kuang & Peng Liu, 2015. "Inflation and House Prices: Theory and Evidence from 35 Major Cities in China," International Real Estate Review, Global Social Science Institute, vol. 18(2), pages 217-240.
    7. Semmler, Willi & Zhang, Wenlang, 2007. "Asset price volatility and monetary policy rules: A dynamic model and empirical evidence," Economic Modelling, Elsevier, vol. 24(3), pages 411-430, May.

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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G1 - Financial Economics - - General Financial Markets

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