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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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