What Asset Prices Should be Targeted by a Central Bank?
This paper investigates the monetary policy design for restoring equilibrium determinacy. Our interests are whether a central bank should respond to asset price fluctuations, and if so, what asset prices should be targeted. We show that a monetary policy response to the price of a productive tangible asset (capital price) is helpful for equilibrium determinacy, while that to the price of an intangible asset that reflects a firms profit (share prices) is a source of equilibrium indeterminacy. This result comes from the two assets prices moving in opposite directions in response to a permanent increase in inflation.
|Date of creation:||Aug 2013|
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- Andrew Levin & Christopher J. Erceg & Dale W. Henderson, 1999.
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Computing in Economics and Finance 1999
1151, Society for Computational Economics.
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"Asset prices, nominal rigidities, and monetary policy,"
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- 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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