What Asset Prices Should Be Targeted by a Central Bank?

Kengo Nutahara

Journal of Money, Credit and Banking, 2014, vol. 46, issue 4, 817-836

Abstract: This paper investigates the monetary policy design for restoring equilibrium determinacy. Our interests are whether a central bank should respond to asset price fluctuations, and if so, what asset prices should be targeted. We show that a monetary policy response to the price of a productive tangible asset (capital price) is helpful for equilibrium determinacy, while that to the price of an intangible asset that reflects a firm's profit (share prices) is a source of equilibrium indeterminacy. This result comes from the two assets' prices moving in opposite directions in response to a permanent increase in inflation.

Date: 2014
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https://doi.org/10.1111/jmcb.12126

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Working Paper: What Asset Prices Should be Targeted by a Central Bank? (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:46:y:2014:i:4:p:817-836

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