Money Illusion and Asset-Price-Targeting Monetary Policy

Kengo Nutahara

No 26-010E, CIGS Working Paper Series from The Canon Institute for Global Studies

Abstract: This paper investigates asset-price-targeting monetary policy in a New Keynesian model with money illusion. Money illusion is introduced as misperceptions of current and expected future inflation. We derive a necessary and sufficient condition for equilibrium determinacy and express it as an extended Taylor principle. In the benchmark case, a policy response to asset prices may weaken determinacy. With current inflation misperception, however, higher inflation can raise dividends and asset prices, making asset-price targeting stabilizing. The results show that the effects of asset-price targeting depend on both nominal rigidities and inflation perceptions.

Pages: 11
Date: 2026-07
New Economics Papers: this item is included in nep-dge and nep-mon
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cigs.canon/en/uploads/2026/07/WP26-010E_260706_nutahara.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cnn:wpaper:26-010e

Access Statistics for this paper

More papers in CIGS Working Paper Series from The Canon Institute for Global Studies Contact information at EDIRC.
Bibliographic data for series maintained by The Canon Institute for Global Studies ().