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Should central banks lean against changes in asset prices?

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  • Sylvain Leduc
  • Jean-Marc Natal

Abstract

How should monetary policy be conducted in the presence of endogenous feedback loops between asset prices, firms? financial health, and economic activity? We reconsider this question in the context of the financial accelerator model and show that, when the level of natural output is inefficient, the optimal monetary policy under commitment leans considerably against movements in asset prices and risk premia. We demonstrate that an endogenous feedback loop is crucial for this result and that price stability is otherwise quasi-optimal absent this feature. We also show that the optimal policy can be closely approximated and implemented using a speed-limit rule that places a substantial weight on the growth of financial variables.

Suggested Citation

  • Sylvain Leduc & Jean-Marc Natal, 2011. "Should central banks lean against changes in asset prices?," Working Paper Series 2011-15, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfwp:2011-15
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    References listed on IDEAS

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    Cited by:

    1. Sylvain Leduc & Jean†Marc Natal, 2018. "Monetary and Macroprudential Policies in a Leveraged Economy," Economic Journal, Royal Economic Society, vol. 128(609), pages 797-826, March.
    2. Hooy, Chee-Wooi & Lim, Kian-Ping, 2013. "Is market integration associated with informational efficiency of stock markets?," Journal of Policy Modeling, Elsevier, vol. 35(1), pages 29-44.
    3. Ravn, Søren Hove, 2014. "Asymmetric monetary policy towards the stock market: A DSGE approach," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 24-41.
    4. Brendon, Charles & Paustian, Matthias & Yates, Tony, 2013. "The pitfalls of speed-limit interest rate rules at the zero lower bound," Bank of England working papers 473, Bank of England.

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    Keywords

    Monetary policy; Asset pricing;

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