Investment and Non-fundamental Movements in Asset prices: is there a role for monetary policy?

The role of monetary policy during periods of asset price volatility has been the subject of discussion among economists and policymakers at least since the 1920s and the Great Depression that followed. Some economists have been arguing that the performance of inflation-targeting central banks can b...

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Bibliographic Details
Published in:Economic issues (Stoke-on-Trent, England) England), 2006-03, Vol.11 (1), p.65-95
Main Authors: Fernando, Alexandre, Bacao, Pedro
Format: Article
Language:English
Subjects:
Assets
Capital
Central banks
Consumption
Economic growth
Economic models
Economic stabilization
Economists
Financial crisis
Housing market
Inflation
Investment
Japan
Monetary policy
Policy making
Prices
Stock exchange
Studies
U.S.A
Volatility
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Summary:The role of monetary policy during periods of asset price volatility has been the subject of discussion among economists and policymakers at least since the 1920s and the Great Depression that followed. Some economists have been arguing that the performance of inflation-targeting central banks can be improved by reacting to misalignments in asset prices, because these may result in distortions in consumption and investment decisions. Using a sticky price model with endogenous investment driven by non-fundamental movements in asset prices, we discuss the potential benefits, in terms of output and inflation stabilisation, of monetary policy reacting to asset prices over and above the deviation of the inflation forecast from the target. We show that identifying the source of asset price movements is crucial to welfare gains. [PUBLICATION ABSTRACT]
ISSN:1363-7029
2514-5479