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Has Monetary Policy Reacted To Asset Price Movements: Evidence From The Uk

  • A. Kontonikas


  • A. Montagnoli

This paper examines the relationship between monetary policy and asset prices in the context of empirical policy rules. We begin our analysis by establishing the forecasting ability of house and stock price changes with respect to future aggregate demand. We then report estimates of monetary policy reaction functions for the United Kingdom over the period 1992-2003. We find that UK policymakers appear to take into account the effect of asset price inflation when setting interest rates with a higher weight being assigned to property market fluctuations. Asset inflationaugmented rules describe more accurately actual policy, and the results are robust to modelling the effect of the Bank of England independence.

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Paper provided by Economics and Finance Section, School of Social Sciences, Brunel University in its series Public Policy Discussion Papers with number 02-11.

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Length: 22 pages
Date of creation: Apr 2002
Date of revision:
Handle: RePEc:bru:bruppp:02-11
Contact details of provider: Postal: Brunel University, Uxbridge, Middlesex UB8 3PH, UK

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