OPTIMAL MONETARY POLICY AND ASSET PRICE MISALIGNMENTS

Alexandros Kontonikas () and Alberto Montagnoli ()

Scottish Journal of Political Economy, 2006, vol. 53, issue 5, 636-654

Abstract: This paper analyses the relationship between monetary policy and asset prices in the context of optimal policy rules. The transmission mechanism is represented by a linearized rational expectations model augmented for the effect of asset prices on aggregate demand. Stabilization objectives are represented by a discounted quadratic loss function penalizing inflation and output gap volatility. Asset prices are allowed to deviate from their intrinsic value due to momentum trading. We find that in the presence of wealth effects and inefficient markets, asset price misalignments from their fundamentals should be included in the optimal interest rate reaction function.

Date: 2006
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https://doi.org/10.1111/j.1467-9485.2006.00398.x

Related works:
Working Paper: Optimal Monetary Policy and Asset Price Misalignments (2005)
Working Paper: Optimal Monetary Policy and Asset Price Misalignments (2004)
Working Paper: Optimal Monetary Policy and Asset Price Misalignments (2003)
Working Paper: Optimal Monetary Policy and Asset Price Misalignments (2003)
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