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Asset Prices and Monetary Policy

  • Ichiro Fukunaga

    (Director, Research and Statistics Department, Bank of Japan (E-mail: ichirou.fukunaga@boj.or.jp))

  • Masashi Saito

    (Deputy Director, Research and Statistics Department, Bank of Japan (E-mail: masashi.saitou@boj.or.jp))

How should central banks take into account movements in asset prices in the conduct of monetary policy? We provide an analysis to address this issue using a dynamic stochastic general equilibrium model incorporating both price rigidities and financial market imperfections. Our findings are twofold. First, in the presence of these two sources of distortion in the economy, central banks face a policy tradeoff between stabilizing inflation and the output gap. With this tradeoff, central banks could strike a better balance between both objectives if they took variables other than inflation, such as asset prices, into consideration. Second, these benefits decrease when central banks rely on limited information about the underlying sources of asset price movements and cannot judge which part of the observed asset price movements reflects inefficiencies in the economy.

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File URL: http://www.imes.boj.or.jp/research/papers/english/09-E-21.pdf
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Paper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 09-E-21.

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Date of creation: Sep 2009
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Handle: RePEc:ime:imedps:09-e-21
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  1. Ichiro Fukunaga, 2002. "Financial Accelerator Effects in Japan's Business Cycles," Bank of Japan Working Paper Series Research and Statistics D, Bank of Japan.
  2. Carlstrom, Charles T & Fuerst, Timothy S, 1997. "Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis," American Economic Review, American Economic Association, vol. 87(5), pages 893-910, December.
  3. Rochelle M. Edge & Thomas Laubach & John C. Williams, 2004. "Learning and shifts in long-run productivity growth," Working Paper Series 2004-04, Federal Reserve Bank of San Francisco.
  4. Olivier Blanchard & Jordi Gali, 2005. "Real Wage Rigidities and the New Keynesian Model," NBER Working Papers 11806, National Bureau of Economic Research, Inc.
  5. Matteo Iacoviello, 2002. "House prices, borrowing constraints and monetary policy in the business cycle," Boston College Working Papers in Economics 542, Boston College Department of Economics, revised 06 Dec 2004.
  6. Tommaso Monacelli & Ester Faia, 2005. "Optimal Interest Rate Rules, Asset Prices and Credit Frictions," Computing in Economics and Finance 2005 452, Society for Computational Economics.
  7. Charles T. Carlstrom & Timothy S. Fuerst & Matthias Paustian, 2010. "Optimal Monetary Policy in a Model with Agency Costs," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 37-70, 09.
  8. Vasco Cúrdia & Michael Woodford, 2008. "Credit frictions and optimal monetary policy," Working Paper Research 146, National Bank of Belgium.
  9. Simon Gilchrist & Masashi Saito, 2008. "Expectations, Asset Prices, and Monetary Policy: The Role of Learning," NBER Chapters, in: Asset Prices and Monetary Policy, pages 45-102 National Bureau of Economic Research, Inc.
  10. Lawrence Christiano & Roberto Motto & Massimo Rostagno, 2007. "Shocks, Structures or Monetary Policies? The Euro Area and US After 2001," NBER Working Papers 13521, National Bureau of Economic Research, Inc.
  11. Vasco Curdia & Michael Woodford, 2010. "Credit Spreads and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 3-35, 09.
  12. 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.
  13. Queijo von Heideken, Virginia, 2008. "How Important are Financial Frictions in the U.S. and the Euro Area?," Working Paper Series 223, Sveriges Riksbank (Central Bank of Sweden).
  14. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," NBER Working Papers 6455, National Bureau of Economic Research, Inc.
  15. Okina, Kunio & Shiratsuka, Shigenori, 2002. "Asset Price Bubbles, Price Stability, and Monetary Policy: Japan' s Experience," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 20(3), pages 35-76, October.
  16. John Y. Campbell, 2008. "Asset Prices and Monetary Policy," NBER Books, National Bureau of Economic Research, Inc, number camp06-1, Jan-Jun.
  17. Gilchrist, Simon & Leahy, John V., 2002. "Monetary policy and asset prices," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 75-97, January.
  18. Campbell, John Y. (ed.), 2008. "Asset Prices and Monetary Policy," National Bureau of Economic Research Books, University of Chicago Press, edition 0, number 9780226092119.
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