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, modeling the interdependence of the real economy, credit and three classes of assets prices: housing prices, equity prices and the nominal exchange rate. We compare the performance of simple and efficient interest rate rules that allow for response to movements in asset prices to the performance of more standard monetary policy rules. We find that including housing prices and equity prices in the policy rules can improve macroeconomic performance in terms of both nominal and real economic stability. In contrast, a response to nominal exchange rate fluctuations can induce excess volatility in general and prove detrimental to macroeconomic stability.
|Date of creation:||03 Oct 2005|
|Date of revision:|
|Contact details of provider:|| Postal: Postboks 1179 Sentrum, 0107 Oslo|
Phone: +47 22 31 60 00
Fax: +47 22 41 31 05
Web page: http://www.norges-bank.no/
More information through EDIRC
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.:
- Orphanides, Athanasios, 1999.
"The Quest for Prosperity Without Inflation,"
Working Paper Series
93, Sveriges Riksbank (Central Bank of Sweden).
- Glenn D. Rudebusch, 2002.
"Assessing the Lucas critique in monetary policy models,"
Working Paper Series
2002-02, Federal Reserve Bank of San Francisco.
- Rudebusch, Glenn D, 2005. "Assessing the Lucas Critique in Monetary Policy Models," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(2), pages 245-72, April.
- Svensson, Lars E.O., 1998.
"Open-Economy Inflation Targeting,"
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.
- Svensson, Lars E O, 1998. "Open-Economy Inflation Targeting," CEPR Discussion Papers 1989, C.E.P.R. Discussion Papers.
- Bardsen, Gunnar & Eitrheim, Oyvind & Jansen, Eilev S. & Nymoen, Ragnar, 2005. "The Econometrics of Macroeconomic Modelling," OUP Catalogue, Oxford University Press, number 9780199246502, December.
- 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.
- 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.
- 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.
- Stephen G. Cecchetti & Anil K Kashyap, 1995.
NBER Working Papers
5310, National Bureau of Economic Research, Inc.
- Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements.
- Nicoletta Batini & Andrew Haldane, 1999.
"Forward-Looking Rules for Monetary Policy,"
in: Monetary Policy Rules, pages 157-202
National Bureau of Economic Research, Inc.
- 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.
- 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.
- Charles Bean, 2003. "Asset prices, financial imbalances and monetary policy: are inflation targets enough?," BIS Working Papers 140, Bank for International Settlements.
- Gunnar Bårdsen, 2005. "Stylized dynamic model representations - a note," Working Paper Series 6305, Department of Economics, Norwegian University of Science and Technology.
- 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.
- Angeloni, Ignazio & Ehrmann, Michael, 2003. "Monetary policy transmission in the euro area: any changes after EMU?," Working Paper Series 0240, European Central Bank.
- 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.
- 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.
- Gunnar Bardsen & Eilev S. Jansen & Ragnar Nymoen, 2003.
"Econometric inflation targeting,"
Royal Economic Society, vol. 6(2), pages 430-461, December.
- Akram, Q. Farooq, 2006. "PPP in the medium run: The case of Norway," Journal of Macroeconomics, Elsevier, vol. 28(4), pages 700-719, December.
- Carl Walsh, 2001.
"Speed Limit Policies: The Output Gap and Optimal Monetary Policy,"
CESifo Working Paper Series
609, CESifo Group Munich.
- 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.
- 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.
When requesting a correction, please mention this item's handle: RePEc:bno:worpap:2005_09. 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: ()
If references are entirely missing, you can add them using this form.