Monetary Policy Rules, Asset Prices and Exchange Rates

Jagjit Chadha (), Lucio Sarno () and Giorgio Valente ()

CDMA Working Paper Series from Centre for Dynamic Macroeconomic Analysis

Abstract: We examine empirically whether asset prices and exchange rates may be admitted into a standard interest rate rule, using data for the US, the UK and Japan since 1979. Asset prices and exchange rates can be employed as information variables for a standard ‘Taylor-type’ rule or as arguments in an augmented interest rate rule. Our empirical evidence, based on measures of the output gap proxied by marginal costs calculations, suggests that monetary policy-makers may use asset prices and exchange rates not only as part of their information set for setting interest rates, but also to set interest rates to offset deviations of asset prices or exchange rates from their equilibrium levels. These results are open to several alternative interpretations.

Keywords: Asset prices; exchange rates; interest rate rules; monetary policy. (search for similar items in EconPapers)
JEL-codes: E40 E44 E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-fin, nep-ifn, nep-mac and nep-mon
Date: Written 2004-10
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Working Paper: Monetary Policy Rules, Asset Prices and Exchange Rates (2003)
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