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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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File URL: http://www.imes.boj.or.jp/research/papers/english/me27-8.pdf
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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. Olivier Blanchard & Jordi Galí, 2005. "Real wage rigidities and the new Keynesian model," Economics Working Papers 912, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2005.
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  7. Vasco Cúrdia & Michael Woodford, 2008. "Credit frictions and optimal monetary policy," Working Paper Research 146, National Bank of Belgium.
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  9. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
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  14. Timothy Fuerst & Matthias Paustian & Charles Carlstorm, 2009. "Optimal monetary policy in a model with agency costs," 2009 Meeting Papers 667, Society for Economic Dynamics.
  15. Ichiro Fukunaga, 2002. "Financial Accelerator Effects in Japan's Business Cycles," Bank of Japan Working Paper Series Research and Statistics D, Bank of Japan.
  16. Queijo von Heideken, Virginia, 2008. "How Important are Financial Frictions in the U.S. and the Euro Area?," Working Paper Series 223, Sveriges Riksbank (Central Bank of Sweden).
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