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Determinacy, Stock Market Dynamics and Monetary Policy Inertia

Damjan Pfajfar () and Emiliano Santoro ()

No 08-30, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: This note deals with the stability properties of an economy where the central bank is concerned with stock market developments. We introduce a Taylor rule reacting to stock price growth rates along with inflation and output gap in a New-Keynesian setup. We explore the performance of this rule from the vantage of equilibrium uniqueness. We show that this reaction function is isomorphic to a rule with an interest rate smoothing term, whose magnitude increases in the degree of aggressiveness towards asset prices growth. As shown by Bullard and Mitra (2007, Determinacy, learnability, and monetary policy inertia, Journal of Money, Credit and Banking 39, 1177-1212) this feature of monetary policy inertia can help at alleviating problems of indeterminacy.

Keywords: monetary policy; asset prices; rational expectation equilibrium uniqueness (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2008-11
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Journal Article: Determinacy, stock market dynamics and monetary policy inertia (2011) Downloads
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