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Please use this identifier to cite or link to this item: http://bura.brunel.ac.uk/handle/2438/921

Title: Should Monetary Policy Respond to Asset Price Misalignments?
Authors: Kontonikas, A
Ioannidis, C
Keywords: Monetary policy; Asset prices
Publication Date: 2003
Publisher: Brunel University
Citation: Economics and Finance Working papers, Brunel University, 03-19
Abstract: This paper analyses the relationship between monetary policy and asset prices using a structural rational expectations model that allows for the effect of asset prices on aggregate demand. We assume that asset prices follow a partial adjustment mechanism whereas they are positively affected by past changes, thus allowing for ‘momentum trading’, while at the same time we allow for reversion towards fundamentals. We then conduct stochastic simulations using two alternative monetary policy rules, inflation-forecast targeting and the standard Taylor rule. The results indicate that, under both rules, interest rate setting that takes into account asset price misalignments leads to lower overall macroeconomic volatility, as measured by the postulated loss function of the central bank.
URI: http://bura.brunel.ac.uk/handle/2438/921
Appears in Collections:Dept of Economics and Finance Research Papers

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