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.
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- Carlstrom, Charles T. & Fuerst, Timothy S., 2005.
"Investment and interest rate policy: a discrete time analysis,"
Journal of Economic Theory,
Elsevier, vol. 123(1), pages 4-20, July.
- Charles T. Carlstrom & Timothy S. Fuerst, 2003. "Investment and interest rate policy: a discrete time analysis," Working Paper 0320, Federal Reserve Bank of Cleveland.
- Gilchrist, Simon & Leahy, John V., 2002. "Monetary policy and asset prices," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 75-97, January.
- 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.
- Charles T. Carlstrom & Timothy S. Fuerst, 2004. "Asset prices, nominal rigidities, and monetary policy," Working Paper 0413, Federal Reserve Bank of Cleveland.
- Andrew Levin & Christopher J. Erceg & Dale W. Henderson, 1999.
"Optimal Monetary Policy with Staggered Wage and Price Contracts,"
Computing in Economics and Finance 1999
1151, Society for Computational Economics.
- 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.
- Christopher J. Erceg & Dale W. Henderson & Andrew T. Levin, 1999. "Optimal monetary policy with staggered wage and price contracts," International Finance Discussion Papers 640, Board of Governors of the Federal Reserve System (U.S.).
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