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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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File URL: http://www3.eeg.uminho.pt/economia/nipe/docs/2002/NIPE_WP_6_2002.PDF
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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
Contact details of provider: Postal: Núcleo de Investigação em Políticas Económicas, Escola de Economia e Gestão, Universidade do Minho, P-4710-057 Braga, Portugal
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  20. Bennett T. McCallum & Edward Nelson, . "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," GSIA Working Papers 1997-71, Carnegie Mellon University, Tepper School of Business.
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  25. Fumio Hayashi, 1981. "Tobin's Marginal q and Average a : A Neoclassical Interpretation," Discussion Papers 457, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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  27. 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.
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