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Asset Prices and Monetary Policy

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  • Mike Kennedy
  • Angel Palerm
  • Charles Pigott
  • Flavia Terribile

Abstract

In this paper, the authors analyse the role of asset market prices in the formation of monetary policy with particular reference to equity markets, a concern for policy makers in the late 1990s. While asset prices have potentially valuable supplementary information for monetary policy makers, they are hard to interpret because of their inherent volatility. Dilemmas arise when asset price movements are large and there are no signs of inflation pressures. Waiting until speculative pressures run their course risks both contagion to other sectors and assets and potentially damaging fallout from a correction. Tightening monetary policy in these circumstances (perhaps to avoid potential fallout on other sectors) would be difficult to justify to the public. In the current situation of low inflation (late 1997), various valuation measures suggest that equity markets are over-valued in the United States, Canada and Italy. Other countries are either at more intermediate positions ... Dans cet article les auteurs analysent le rôle des prix du marché des actifs dans le développement d'une politique monétaire étroitement liée au marché des capitaux, préoccupation des décideurs de la fin des années 90. Bien que les prix des actifs représentent une information de valeur pour les responsables de la politique monétaire, ils sont difficilement interprétables du fait de leur volatilité inhérente. Les problèmes surgissent quand les mouvements des actifs sont importants alors qu'il n'y a pas de signe de poussée inflationniste. Attendre que les pressions spéculatives suivent leur cours comporte un risque de contagion pour les autres secteurs et actifs et peut nuire aux retombées d'une éventuelle correction. Resserrer la politique monétaire dans ces conditions (afin peut-être d'éviter de possibles retombées sur d'autres secteurs) serait difficile à justifier face au public. Dans la situation actuelle de faible inflation (fin 1997) plusieurs mesures d'évaluation laissent à ...

Suggested Citation

  • Mike Kennedy & Angel Palerm & Charles Pigott & Flavia Terribile, 1998. "Asset Prices and Monetary Policy," OECD Economics Department Working Papers 188, OECD Publishing.
  • Handle: RePEc:oec:ecoaaa:188-en
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    File URL: http://dx.doi.org/10.1787/152217364457
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    Cited by:

    1. Stéphanie Guichard, 1998. "La politique monétaire et la crise japonaise," Working Papers 1998-06, CEPII research center.
    2. Quentin Wibaut, 2000. "Politique monétaire et prix des actifs: le cas des Etats-Unis," Working Paper Document 11, National Bank of Belgium.
    3. Davis, E. Philip & Madsen, Jakob B., 2008. "Productivity and equity market fundamentals: 80 years of evidence for 11 OECD countries," Journal of International Money and Finance, Elsevier, vol. 27(8), pages 1261-1283, December.
    4. Fornari, F. & Pericoli, M., 2000. "Stock Values and Fundamentals: Link or Irrationality?," Papers 378, Banca Italia - Servizio di Studi.

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