Was Bernanke Right? Targeting Asset Prices Maynotbe a Good Idea After All

Tiziana Assenza, Michele Berardi and Domenico Delli Gatti

A chapter in Monetary Policy in the Context of the Financial Crisis: New Challenges and Lessons, 2015, vol. 24, pp 451-496 from Emerald Group Publishing Limited

Abstract: Should the central bank target asset price inflation? In their 1999 paper Bernanke and Gertler claimed that price stability and financial stability are “mutually consistent objectives” in a flexible inflation targeting regime which “dictates that central banks … should not respond to changes in asset prices.” This conclusion is straightforward within their framework in which asset price inflation shows up as a factor “augmenting” the IS curve. In this chapter, we pursue a different modeling strategy so that, in the end, asset price dynamics will be incorporated into the NK Phillips curve. We put ourselves, therefore, in the best position to obtain a significant stabilizing role for asset price targeting. It turns out, however, that inflation volatility is higher in the asset price targeting case. After all, therefore, targeting asset prices may not be a good idea.

Keywords: cost channel; asset prices; Taylor rules; E42; E52 (search for similar items in EconPapers)
Date: 2015
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Working Paper: Was Bernanke Right? Targeting Asset Prices may not be a Good Idea after all (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eme:isetez:s1571-038620150000024025

DOI: 10.1108/S1571-038620150000024025

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