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Asset Prices and Monetary Policy: Some Notes

Author

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  • Junning Cai

    (University of Hawaii at Manoa)

Abstract

Three issues regarding asset prices and monetary policy are clarified. First, increases in asset prices due to monetary expansion, despite their “paper” wealth nature, tend to make current consumers as a whole wealthier. Second, the weaker (stronger) effect of monetary policy on investment through the Tobin’s q effect is, the stronger (weaker) monetary effect on consumption through the wealth effect. Third, from the perspective of macroeconomic stability, the soundness of asset market performances does not depend on whether they are fundamental or not, but on their compatibility with the AD-AS balance in the long run.

Suggested Citation

  • Junning Cai, 2003. "Asset Prices and Monetary Policy: Some Notes," Macroeconomics 0305006, EconWPA, revised 13 May 2003.
  • Handle: RePEc:wpa:wuwpma:0305006
    Note: Type of Document - PDF; prepared on PC; to print on HP; pages: 53
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    asset prices; monetary policy; paper wealth; wealth effect; Tobin's q; bubbles;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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