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Should monetary policy respond to asset price bubbles? : some experimental results

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  • Andrew J. Filardo

Abstract

Should central banks respond to asset price bubbles? This paper explores this monetary policy question in a hypothetical economy subject to asset price bubbles. Despite the highly stylized structure of the model, the results reveal several practical monetary policy lessons. First, a monetary authority should generally respond to asset prices as long as asset prices contain reliable information about inflation and output. Second, this finding holds even if a monetary authority cannot distinguish between fundamental and bubble asset price behavior. Third, a monetary authority’s desire to respond to asset prices falls dramatically as its preference to smooth interest rates rises. Finally, a monetary authority should not respond to asset prices if there is considerable uncertainty about the macroeconomic role of asset prices.

Suggested Citation

  • Andrew J. Filardo, 2001. "Should monetary policy respond to asset price bubbles? : some experimental results," Research Working Paper RWP 01-04, Federal Reserve Bank of Kansas City.
  • Handle: RePEc:fip:fedkrw:rwp01-04
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    Cited by:

    1. Helmut Wagner & Wolfram Berger, 2004. "Globalization, Financial Volatility and Monetary Policy," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 31(2), pages 163-184, June.
    2. Helmut Wagner & Wolfram Berger, 2003. "Financial Globalization and Monetary Policy," DNB Staff Reports (discontinued) 95, Netherlands Central Bank.
    3. Hoffmann, Andreas, 2013. "Did the Fed and ECB react asymmetrically with respect to asset market developments?," Journal of Policy Modeling, Elsevier, vol. 35(2), pages 197-211.
    4. Zampolli, Fabrizio, 2006. "Optimal monetary policy in a regime-switching economy: The response to abrupt shifts in exchange rate dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 30(9-10), pages 1527-1567.
    5. Luís, Pacheco, 2004. "Asset Prices and Monetary Policy in the Euro Area: a tentative model," MPRA Paper 6579, University Library of Munich, Germany.
    6. Kim, Soyoung & Yang, Doo Yong, 2008. "The Impact of Capital Inflows on Emerging East Asian Economies: Is Too Much Money Chasing Too Little Good?," Working Papers on Regional Economic Integration 15, Asian Development Bank.
    7. Dai, Meixing & Sidiropoulos, Moïse, 2002. "Règle du taux d'intérêt optimale, prix des actions et taux d'inflation anticipé : une étude de la stabilité macroéconomique
      [Optimal interest rate rule, asset prices and expected inflation rate : a
      ," MPRA Paper 14401, University Library of Munich, Germany, revised Jun 2003.
    8. I. Arnold & P.J.A. van Els & J. de Haan, 2002. "Wealth Effects and Monetary Policy," WO Research Memoranda (discontinued) 719, Netherlands Central Bank, Research Department.
    9. repec:ipg:wpaper:2014-462 is not listed on IDEAS
    10. Hoffmann, Andreas, 2009. "Fear of depression - Asymmetric monetary policy with respect to asset markets," MPRA Paper 17522, University Library of Munich, Germany.
    11. Myftari, Entela & Rossi, Sergio, 2010. "Prix des actifs et politique monétaire : enjeux et perspectives après la crise financière de 2007-2009," L'Actualité Economique, Société Canadienne de Science Economique, vol. 86(3), pages 355-383, septembre.
    12. Nagayasu, Jun, 2016. "Inflation and Bubbles in the Japanese Condominium Market," MPRA Paper 71192, University Library of Munich, Germany.
    13. Albulescu, Claudiu Tiberiu, 2013. "Financial Stability and Monetary Policy: A Reduced-Form Model for the EURO Area," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 62-81, March.
    14. Disyatat, Piti, 2010. "Inflation targeting, asset prices, and financial imbalances: Contextualizing the debate," Journal of Financial Stability, Elsevier, vol. 6(3), pages 145-155, September.
    15. José Mauricio Gil León, 2015. "Relación entre política monetaria y estabilidad financiera: un análisis aplicado para Colombia," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, vol. 33(77), pages 133-148, June.
    16. Dai, Meixing & Sidiropoulos, Moïse, 2003. "Les prix des actifs et la stratégie de politique monétaire de la BCE
      [Asset prices and the monetary policy strastegy of the ECB]
      ," MPRA Paper 13833, University Library of Munich, Germany, revised Jul 2003.
    17. Fabrizio Zampolli, 2004. "Optimal monetary policy in a regime-switching economy," Computing in Economics and Finance 2004 166, Society for Computational Economics.
    18. Gilles, Philippe & Huchet, Nicolas & Gauvin, Marie-Sophie, 2012. "Politique monétaire, choix de portefeuille du secteur bancaire et canal de la prise de risque," L'Actualité Economique, Société Canadienne de Science Economique, vol. 88(2), pages 175-196, Juin.
    19. Siklos, Pierre L. & Bohl, Martin T. & Werner, Thomas, 2003. "Did the Bundesbank React to Stock Price Movements?," Discussion Paper Series 1: Economic Studies 2003,14, Deutsche Bundesbank.
    20. Elmer Sterken, 2004. "The Role of the IFO Business Climate Indicator and Asset Prices in German Monetary Policy," CESifo Working Paper Series 1204, CESifo Group Munich.
    21. Jan Willem van den End, 2006. "Indicator and boundaries of financial stability," DNB Working Papers 097, Netherlands Central Bank, Research Department.
    22. Greg Tkacz & Carolyn Wilkins, 2006. "Linear and Threshold Forecasts of Output and Inflation with Stock and Housing Prices," Staff Working Papers 06-25, Bank of Canada.

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    Keywords

    Monetary policy ; Asset pricing;

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