The Role of Asset Prices in Best-Practice Monetary Policy

Robert Pavasuthipaisit
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Robert Pavasuthipaisit: True Corporation

International Journal of Central Banking, 2010, vol. 6, issue 2, 81-115

Abstract: I study the role of asset prices in the conduct of monetary policy under the commitment equilibrium. The findings lend support to the lean-against-the wind strategy in that it is optimal for the central bank to set interest rates to respond to asset-price movements. The gain from responding to asset prices comes from the fact that asset-price movements can provide a signal about the development in the state of the economy. The paper also suggests that prior to and during the subprime mortgage crisis of 2007, it would have been optimal for the Federal Reserve to increase the weight of asset prices in its rate-setting decision.

JEL-codes: E44 E52 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:ijc:ijcjou:y:2010:q:2:a:4

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