Monetary policy and asset prices: to respond or not?
We investigate whether there is a case for asset prices in interest rates rules within a small econometric model of the Norwegian economy, modelling the interdependence of the real economy, credit and three classes of asset prices: housing prices, equity prices and the nominal exchange rate. We compare the performance of simple interest rate rules that allow for additional response to movements in asset prices to the performance of more standard monetary policy rules. We find that including housing and|or equity prices in the policy rules improve macroeconomic performance in terms of both nominal and real economic stability. In contrast, responding to exchange rate fluctuations seems less effective to this end, mainly because the instrument must be used quite actively, which contributes to higher volatility in general. Copyright © 2006 John Wiley & Sons, Ltd.
Volume (Year): 11 (2006)
Issue (Month): 3 ()
|Contact details of provider:|| Web page: http://www.interscience.wiley.com/jpages/1076-9307/|
|Order Information:||Web: http://jws-edcv.wiley.com/jcatalog/JournalsCatalogOrder/JournalOrder?PRINT_ISSN=1076-9307|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Chadha, Jagjit S & Sarno, Lucio & Valente, Giorgio, 2003.
"Monetary Policy Rules, Asset Prices and Exchange Rates,"
CEPR Discussion Papers
4114, C.E.P.R. Discussion Papers.
- Jagjit S. Chadha & Lucio Sarno & Giorgio Valente, 2004. "Monetary Policy Rules, Asset Prices, and Exchange Rates," IMF Staff Papers, Palgrave Macmillan, vol. 51(3), pages 529-552, November.
- Jagjit S. Chadha & Lucio Sarno & Giorgio Valente, 2004. "Monetary Policy Rules, Asset Prices and Exchange Rates," CDMA Working Paper Series 200403, Centre for Dynamic Macroeconomic Analysis.
- Rudebusch, Glenn D, 2005.
"Assessing the Lucas Critique in Monetary Policy Models,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 37(2), pages 245-272, April.
- Glenn D. Rudebusch, 2002. "Assessing the Lucas critique in monetary policy models," Working Paper Series 2002-02, Federal Reserve Bank of San Francisco.
- Svensson, Lars E O, 1998.
"Open-Economy Inflation Targeting,"
CEPR Discussion Papers
1989, C.E.P.R. Discussion Papers.
- Svensson, Lars E.O., 1998. "Open-Economy Inflation Targeting," Seminar Papers 638, Stockholm University, Institute for International Economic Studies.
- Svensson, L.E.O., 1998. "Open-Economy Inflation Targeting," Papers 638, Stockholm - International Economic Studies.
- Lars E. O. Svensson, 2000. "Open-Economy Inflation Targeting," NBER Working Papers 6545, National Bureau of Economic Research, Inc.
- Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
- Gunnar Bårdsen & Eilev S. Jansen & Ragnar Nymoen, 1999.
"Econometric Inflation Targeting,"
Working Paper Series
0502, Department of Economics, Norwegian University of Science and Technology, revised 30 Oct 2001.
- Angeloni, Ignazio & Ehrmann, Michael, 2003. "Monetary policy transmission in the euro area: any changes after EMU?," Working Paper Series 0240, European Central Bank.
- Nicoletta Batini & Andrew G Haldane, 1999.
"Forward-looking rules for monetary policy,"
Bank of England working papers
91, Bank of England.
- Akram, Q. Farooq, 2006. "PPP in the medium run: The case of Norway," Journal of Macroeconomics, Elsevier, vol. 28(4), pages 700-719, December.
- Cecchetti, Stephen G. & Kashyap, Anil K, 1996.
European Economic Review,
Elsevier, vol. 40(2), pages 331-360, February.
- Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements.
- Bordo, Michael D & Jeanne, Olivier, 2002.
"Boom-Busts in Asset Prices, Economic Instability and Monetary Policy,"
CEPR Discussion Papers
3398, C.E.P.R. Discussion Papers.
- Michael D. Bordo & Olivier Jeanne, 2002. "Boom-Busts in Asset Prices, Economic Instability, and Monetary Policy," NBER Working Papers 8966, National Bureau of Economic Research, Inc.
- Carl Walsh, 2003.
"Speed Limit Policies: The Output Gap and Optimal Monetary Policy,"
American Economic Review,
American Economic Association, vol. 93(1), pages 265-278, March.
- Carl Walsh, 2001. "Speed Limit Policies: The Output Gap and Optimal Monetary Policy," CESifo Working Paper Series 609, CESifo Group Munich.
- Orphanides, Athanasios, 2000.
"The quest for prosperity without inflation,"
Working Paper Series
0015, European Central Bank.
- Gunnar Bardsen & Eilev S. Jansen & Ragnar Nymoen, 2004. "Econometric Evaluation of the New Keynesian Phillips Curve," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 66(s1), pages 671-686, 09.
- Charles Bean, 2003.
"Asset prices, financial imbalances and monetary policy: are inflation targets enough?,"
BIS Working Papers
140, Bank for International Settlements.
- Charles Bean, 2003. "Asset Prices, Financial Imbalances and Monetary Policy: Are Inflation Targets Enough?," RBA Annual Conference Volume, in: Anthony Richards & Tim Robinson (ed.), Asset Prices and Monetary Policy Reserve Bank of Australia.
- Mojon, Benoît & Kashyap, Anil K. & Angeloni, Ignazio & Terlizzese, Daniele, 2002. "Monetary Transmission in the Euro Area : Where Do We Stand?," Working Paper Series 0114, European Central Bank.
- Bardsen, Gunnar & Eitrheim, Oyvind & Jansen, Eilev S. & Nymoen, Ragnar, 2005. "The Econometrics of Macroeconomic Modelling," OUP Catalogue, Oxford University Press, number 9780199246502.
- Gunnar Bårdsen, 2005. "Stylized dynamic model representations - a note," Working Paper Series 6305, Department of Economics, Norwegian University of Science and Technology.
When requesting a correction, please mention this item's handle: RePEc:ijf:ijfiec:v:11:y:2006:i:3:p:279-292. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)or (Christopher F. Baum)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.