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Monetary Policy and Asset Price Gap Signal Technology in a New Keynesian Framework

Mislin Alexander ()
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Mislin Alexander: Federal Ministry of Finance, Wilhelmstrasse 97, 10117Berlin, Germany

The Economists' Voice, 2021, vol. 18, issue 1, 31-45

Abstract: This article develops a New Keynesian model in which the inflation rate depends on the present value of future output gaps and asset prices gaps. The latter follows a price adjustment process. These asset price gaps are driven by ‛asset price gap signal technology’, a measure of exponentially distributed asset price gaps with a signalling mechanism. Within a dynamic stochastic optimisation approach, I identify a policy rule for the central bank in which the asset price gap the difference between the actual asset price at time t to its fundamental value plays a crucial role in determining the nominal rate of interest.

Keywords: asset price gap; monetary policy; policy rule (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1515/ev-2021-0003

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