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Was Bernanke Right? Targeting Asset Prices May : not: be a Good Idea After All

In: Monetary Policy in the Context of the Financial Crisis: New Challenges and Lessons

Author

Listed:
  • Tiziana Assenza
  • Michele Berardi
  • Domenico Delli Gatti

Abstract

Should the central bank target asset price inflation? In their 1999 paper Bernanke and Gertler claimed that price stability and financial stability are “mutually consistent objectives” in a flexible inflation targeting regime which “dictates that central banks … should not respond to changes in asset prices.” This conclusion is straightforward within their framework in which asset price inflation shows up as a factor “augmenting” the IS curve. In this chapter, we pursue a different modeling strategy so that, in the end, asset price dynamics will be incorporated into the NK Phillips curve. We put ourselves, therefore, in the best position to obtain a significant stabilizing role for asset price targeting. It turns out, however, that inflation volatility is higher in the asset price targeting case. After all, therefore, targeting asset prices may not be a good idea.

Suggested Citation

  • Tiziana Assenza & Michele Berardi & Domenico Delli Gatti, 2015. "Was Bernanke Right? Targeting Asset Prices May : not: be a Good Idea After All," International Symposia in Economic Theory and Econometrics, in: William A. Barnett & Fredj Jawadi (ed.),Monetary Policy in the Context of the Financial Crisis: New Challenges and Lessons, volume 24, pages 451-496, Emerald Publishing Ltd.
  • Handle: RePEc:eme:isetez:s1571-038620150000024025
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    References listed on IDEAS

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    1. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.),Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393, Elsevier.
    2. Marco Airaudo & Salvatore Nisticò & Luis‐Felipe Zanna, 2015. "Learning, Monetary Policy, and Asset Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(7), pages 1273-1307, October.
    3. Matteo Iacoviello, 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle," American Economic Review, American Economic Association, vol. 95(3), pages 739-764, June.
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    5. Tommaso Monacelli, 2008. "Optimal Monetary Policy with Collateralized Household Debt and Borrowing Constraints," NBER Chapters, in: Asset Prices and Monetary Policy, pages 103-146, National Bureau of Economic Research, Inc.
    6. Charles T. Carlstrom & Timothy Fuerst, 2007. "Asset Prices, Nominal Rigidities, and Monetary Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(2), pages 256-275, April.
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    8. Michael Woodford, 1999. "Optimal Monetary Policy Inertia," Manchester School, University of Manchester, vol. 67(s1), pages 1-35.
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    Cited by:

    1. Machado, Vicente da Gama, 2013. "Monetary policy rules, asset prices and adaptive learning," Journal of Financial Stability, Elsevier, vol. 9(3), pages 251-258.

    More about this item

    Keywords

    cost channel; asset prices; Taylor rules; E42; E52;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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