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Asset Prices and Monetary Policy

  • Ichiro Fukunaga

    (Research and Statistics Department, Bank of Japan (E-mail: ichirou.fukunaga@boj.or.jp))

  • Masashi Saito

    (Research and Statistics Department, Bank of Japan (E-mail: masashi.saitou@boj.or.jp))

How should central banks take into account movements in asset prices in the conduct of monetary policy? We provide an analysis to address this issue using a dynamic stochastic general equilibrium model incorporating both price rigidities and financial market imperfections. Our findings are twofold. First, in the presence of these two sources of distortion in the economy, central banks face a policy trade-off between stabilizing inflation and the output gap. With this trade-off, central banks could strike a better balance between both objectives if they took variables other than inflation, such as asset prices, into consideration. Second, these benefits decrease when central banks rely on limited information about the underlying sources of asset price movements and cannot judge which part of the observed asset price movements reflects inefficiencies in the economy.

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Article provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.

Volume (Year): 27 (2009)
Issue (Month): 1 (November)
Pages: 143-170

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Handle: RePEc:ime:imemes:v:27:y:2009:i:1:p:143-170
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  1. Campbell, John Y. (ed.), 2008. "Asset Prices and Monetary Policy," National Bureau of Economic Research Books, University of Chicago Press, edition 0, number 9780226092119.
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  17. Okina, Kunio & Shiratsuka, Shigenori, 2002. "Asset Price Bubbles, Price Stability, and Monetary Policy: Japan' s Experience," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 20(3), pages 35-76, October.
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