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Stock Prices, Exchange Rates and Monetary Policy

  • Dor, Eric

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES); Université catholique de Lille, Faculté Libre des Sciences Economiques, Institut d’Economie Scientifique et de Gestion IESEG, Labores-CNRS)

  • Durré, Alain

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

This paper attempts to model the relationship between monetary policy and financial asset prices. We develop an aggregative model under forward-looking rational expectations to analyse the optimal monetary policy response to stock prices and exchange rates shocks. We first demonstrate that a model ignoring the impact of equity prices and exchange rates on aggregate demand leads to an overestimation of the optimal policy response to standard shocks. Second, we clearly point out that a correct assessment of the relation between optimal monetary policy and either equity prices or exchange rates necessitates a model including both kinds of financial prices simultaneously. Third, we show how these interactions between financial asset prices and monetary policy are affected by a particular form of coordination between monetary policy and fiscal policy, arising from a public debt solvency constraint.

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File URL: http://sites.uclouvain.be/econ/DP/IRES/2000-001.pdf
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Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 2000001.

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Length: 35
Date of creation: 01 Dec 1999
Date of revision:
Handle: RePEc:ctl:louvir:2000001
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  1. Ben Bernanke & Mark Gertler, 1999. "Monetary policy and asset price volatility," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 17-51.
  2. Barro, Robert J., 1977. "Long-term contracting, sticky prices, and monetary policy," Journal of Monetary Economics, Elsevier, vol. 3(3), pages 305-316, July.
  3. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  4. Barro, Robert J., 1976. "Rational expectations and the role of monetary policy," Journal of Monetary Economics, Elsevier, vol. 2(1), pages 1-32, January.
  5. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
  6. Artus, P., 1998. "Inertie des anticipations de prix et politique economique," Papers 1998-20/ma, Caisse des Depots et Consignations - Cahiers de recherche.
  7. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148 Elsevier.
  8. Timothy Cogley, 1999. "Should the Fed take deliberate steps to deflate asset price bubbles?," Economic Review, Federal Reserve Bank of San Francisco, pages 42-52.
  9. Thomas Krichel & Paul Levine & Joseph Pearlman, 1996. "Fiscal and monetary policy in a monetary union: Credible inflation targets or monetized debt?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 132(1), pages 28-54, March.
  10. Broadbent, Ben & Barro, Robert J., 1997. "Central bank preferences and macroeconomic equilibrium," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 17-43, June.
  11. Gerlach, Stefan & Smets, Frank, 2000. "MCIs and monetary policy," European Economic Review, Elsevier, vol. 44(9), pages 1677-1700, October.
  12. Matthew B. Canzoneri & Dale W. Henderson, 1991. "Monetary Policy in Interdependent Economies: A Game-Theoretic Approach," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031787, June.
  13. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
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