Asset Prices and Monetary Policy

Ichiro Fukunaga and Masashi Saito
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Masashi Saito: Research and Statistics Department, Bank of Japan (E-mail: masashi.saitou@boj.or.jp)

Monetary and Economic Studies, 2009, vol. 27, issue 1, pages 143-170

Abstract: How should central banks take into account movements in asset prices in the conduct of monetary policy? We provide an analysis to address this issue using a dynamic stochastic general equilibrium model incorporating both price rigidities and financial market imperfections. Our findings are twofold. First, in the presence of these two sources of distortion in the economy, central banks face a policy trade-off between stabilizing inflation and the output gap. With this trade-off, central banks could strike a better balance between both objectives if they took variables other than inflation, such as asset prices, into consideration. Second, these benefits decrease when central banks rely on limited information about the underlying sources of asset price movements and cannot judge which part of the observed asset price movements reflects inefficiencies in the economy.

Keywords: Asset prices; Monetary policy; Financial frictions; Policy trade-offs (search for similar items in EconPapers)
JEL-codes: E44 E52 (search for similar items in EconPapers)
Date: 2009
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Working Paper: Asset Prices and Monetary Policy (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:ime:imemes:v:27:y:2009:i:1:p:143-170

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