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Monetary Policy and Asset Prices: Does 'Benign Neglect' Make Sense?

Michael Bordo () and Olivier Jeanne ()

International Finance, 2002, vol. 5, issue 2, 139-64

Abstract: The link between monetary policy and asset price movements has been of perennial interest to policy makers. In this paper we consider the potential case for pre-emptive monetary restrictions when asset price reversals can have serious effects on real output. First, we present some stylized facts on boom-bust dynamics in stock and property prices in developed economies. We then discuss the case for a pre-emptive monetary policy in the context of a stylized framework with collateral constraints in the productive sector. We find that whether such a policy is warranted depends on the economic conditions in a complex, nonlinear way. The optimal policy cannot be summarized by a simple policy rule of the type considered in the inflation-targeting literature. Copyright 2002 by Blackwell Publishers Ltd.

Date: 2002
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