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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