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Monetary Policy under Uncertainty about the Nature of Asset-Price Shocks


  • David L. Haugh

    (Economics Department, OECD, Centre for Applied Macroeconomic Analysis, ANU)


The effects of an asset-price movement on inflation and output depend on whether that movement is fundamental or not. However, central banks cannot observe this. This paper examines the issue of how central banks should respond to asset prices given this constraint. Using a modified version of the Gruen, Plumb, and Stone (2005) model, this paper finds it is better to adopt a three-standard-deviation threshold rule for deciding whether to include asset prices in output-gap and inflation forecasts and monetary policy than to ignore asset prices altogether.

Suggested Citation

  • David L. Haugh, 2008. "Monetary Policy under Uncertainty about the Nature of Asset-Price Shocks," International Journal of Central Banking, International Journal of Central Banking, vol. 4(4), pages 39-83, December.
  • Handle: RePEc:ijc:ijcjou:y:2008:q:4:a:2

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    References listed on IDEAS

    1. De Long, J Bradford, et al, 1990. " Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance, American Finance Association, vol. 45(2), pages 379-395, June.
    2. Tim Robinson & Andrew Stone, 2006. "Monetary Policy, Asset-Price Bubbles, and the Zero Lower Bound," NBER Chapters,in: Monetary Policy with Very Low Inflation in the Pacific Rim, NBER-EASE, Volume 15, pages 43-90 National Bureau of Economic Research, Inc.
    3. Stephen G. Cecchetti & Hans Genberg & Sushil Wadhwani, 2002. "Asset Prices in a Flexible Inflation Targeting Framework," NBER Working Papers 8970, National Bureau of Economic Research, Inc.
    4. David Gruen & Michael Plumb & Andrew Stone, 2005. "How Should Monetary Policy Respond to Asset-Price Bubbles?," International Journal of Central Banking, International Journal of Central Banking, vol. 1(3), December.
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    Cited by:

    1. Andrew Filardo & Hans Genberg, 2010. "Monetary Policy Strategies in the Asia and Pacific Region : What Way Forward?," Finance Working Papers 23011, East Asian Bureau of Economic Research.
    2. Vicente da Gama Machado, 2012. "Monetary Policy, Asset Prices and Adaptive Learning," Working Papers Series 274, Central Bank of Brazil, Research Department.
    3. Andrew Filardo & Hans Genberg, 2012. "Monetary Policy Strategies in the Asia and Pacific Region: Which Way Forward?," Chapters,in: Monetary and Currency Policy Management in Asia, chapter 3 Edward Elgar Publishing.
    4. Ida, Daisuke, 2011. "Monetary policy and asset prices in an open economy," The North American Journal of Economics and Finance, Elsevier, vol. 22(2), pages 102-117, August.
    5. repec:exl:25engi:v:27:y:2016:i:5:p:538-545 is not listed on IDEAS
    6. Ida, Daisuke, 2013. "Tobin's Q channel and monetary policy rules under incomplete exchange rate pass-through," Economic Modelling, Elsevier, vol. 33(C), pages 733-740.
    7. Dominique Pepin, 2010. "La BCE réagit-elle au prix des actifs financiers ?," Working Papers hal-00963626, HAL.

    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General


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