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Monetary Policy, Investment and Non-Fundamental Shocks

Using a sticky price model with endogenous investment and adjustment costs we analyse the benefits of monetary policy reacting to asset prices, when investment is under the influence of a non-fundamental shock, both for inflation-forecast targeting rules and for Taylor rules. We conclude that in this context there are benefits from reacting to asset prices that result from a more stable output gap, which is the consequence of a much lower volatility in firms’ investment. However, welfare gains depend on the source of asset price movements. Reacting to asset prices when there is a non-fundamental shock to investment stabilises both the asset price and inflation.

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Paper provided by NIPE - Universidade do Minho in its series NIPE Working Papers with number 6/2002.

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Date of creation: 2002
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Handle: RePEc:nip:nipewp:6/2002
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Núcleo de Investigação em Políticas Económicas, Escola de Economia e Gestão, Universidade do Minho, P-4710-057 Braga, Portugal

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  1. Glenn Rudebusch, 2000. "Assessing Nominal Income Rules for Monetary Policy with Model and Data Uncertainty," Econometric Society World Congress 2000 Contributed Papers 0065, Econometric Society.
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  10. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-48, April.
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  13. Frank Smets, 1997. "Financial-asset Prices and Monetary Policy: Theory and Evidence," RBA Annual Conference Volume, in: Philip Lowe (ed.), Monetary Policy and Inflation Targeting Reserve Bank of Australia.
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  19. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
  20. Andrew G. Haldane & Nicoletta Batini, 1998. "Forward-Looking Rules for Monetary Policy," NBER Working Papers 6543, National Bureau of Economic Research, Inc.
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  23. William Poole, 2001. "What role for asset prices in U.S. monetary policy?," Speech 57, Federal Reserve Bank of St. Louis.
  24. Alexandre, Fernando & Driffill, John & Spagnolo, Fabio, 2002. "Inflation Targeting, Exchange Rate Volatility and International Policy Coordination," Manchester School, University of Manchester, vol. 70(4), pages 546-69, Special I.
  25. Temple, Jonathan, 2002. "An Assessment of the New Economy," CEPR Discussion Papers 3597, C.E.P.R. Discussion Papers.
  26. Jonathan Temple, 2002. "The Assessment: The New Economy," Oxford Review of Economic Policy, Oxford University Press, vol. 18(3), pages 241-264.
  27. Jeff Fuhrer & George Moore, 1995. "Inflation Persistence," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 127-159.
  28. Fernando Alexandre & Pedro Bação, 2002. "Equitity prices and Monetary Policy: An Overview with an Exploratory Model," NIPE Working Papers 1/2002, NIPE - Universidade do Minho.
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