Asset Prices and Monetary Policy: A New View of the Cost Channel

Tiziana Assenza, Michele Berardi and Domenico Delli Gatti

No 09-17, CeNDEF Working Papers from Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance

Abstract: Should the central bank act to prevent "excessive" asset price dynamics or should it wait until the boom spontaneously turns into a crash and intervene afterwards to attenuate the fallout on the real economy? The standard "three equation" New Keynesian framework is inadequate to analyse this issue for the very simple reason that asset prices are not explicitly included in the model. There are two straightforward ways to take into account asset price dynamics in this framework. First of all, the objective function of the central bank - usually defined in terms of inflation and the output gap - could be "augmented" to take into account asset price inflation. Second, expected asset price inflation can affect the IS curve through a wealth effect. In this paper we follow a different route. In our model in fact, the expected asset price dynamics will be eventually incorporated into the NK Phillips curve. This is due to the assumption of a cost channel for monetary policy which is activated whenever monetary policy affects asset prices and dividends. In fact they determine the cost of external finance in the simple "equity only" financing model we consider, abstracting for simplicity from internal funds and the credit market.

Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://cendef.uva.nl/binaries/content/assets/subsi ... 11.pdf?1363343345817 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ams:ndfwpp:09-17

Access Statistics for this paper

More papers in CeNDEF Working Papers from Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance Dept. of Economics and Econometrics, Universiteit van Amsterdam, Roetersstraat 11, NL - 1018 WB Amsterdam, The Netherlands. Contact information at EDIRC.
Bibliographic data for series maintained by Cees C.G. Diks ().