Asset Prices, Nominal Rigidities, and Monetary Policy

Charles Carlstrom and Timothy Fuerst

Review of Economic Dynamics, 2007, vol. 10, issue 2, 256-275

Abstract: Should monetary policy respond to asset prices? This paper analyzes this question from the vantage point of equilibrium determinacy. A central bank responding to asset prices is indirectly responding to firm profits. In a model with sticky prices, increases in inflation tend to lower firm profits so that a central bank responding to share prices implicitly weakens its overall response to inflation. This is the novel source of equilibrium indeterminacy highlighted in the paper. (Copyright: Elsevier)

Keywords: Monetary policy; Equilibrium determinacy; Interest rate rules (search for similar items in EconPapers)
JEL-codes: E31 E52 (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (88)

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Working Paper: Asset prices, nominal rigidities, and monetary policy (2004)
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DOI: 10.1016/j.red.2006.11.005

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