Monetary policy and asset prices: To respond or not?

Q. Farooq Akram, Gunnar Bårdsen () and Øyvind Eitrheim

No 2005/9, Working Paper from Norges Bank

Abstract: We investigate whether there is a case for asset prices in interest rates rules within a small econometric model of the Norwegian economy, modeling the interdependence of the real economy, credit and three classes of assets prices: housing prices, equity prices and the nominal exchange rate. We compare the performance of simple and efficient interest rate rules that allow for response to movements in asset prices to the performance of more standard monetary policy rules. We find that including housing prices and equity prices in the policy rules can improve macroeconomic performance in terms of both nominal and real economic stability. In contrast, a response to nominal exchange rate fluctuations can induce excess volatility in general and prove detrimental to macroeconomic stability.

Keywords: Monetary policy; asset prices; simple interest rate rules; econometric model (search for similar items in EconPapers)
JEL-codes: C51 C52 C53 E47 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-mac and nep-mon
Date: 2005-10-03
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Related works:
Working Paper: Monetary policy and asset prices: To respond or not? (2005)
Journal Article: Monetary policy and asset prices: to respond or not? (2006)
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Persistent link: http://EconPapers.repec.org/RePEc:bno:worpap:2005_09

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