Monetary Policy, Investment and Non-Fundamental Shocks

Fernando Alexandre ()

No 6/2002, NIPE Working Papers from NIPE - Universidade do Minho

Abstract: Using a sticky price model with endogenous investment and adjustment costs we analyse the benefits of monetary policy reacting to asset prices, when investment is under the influence of a non-fundamental shock, both for inflation-forecast targeting rules and for Taylor rules. We conclude that in this context there are benefits from reacting to asset prices that result from a more stable output gap, which is the consequence of a much lower volatility in firms’ investment. However, welfare gains depend on the source of asset price movements. Reacting to asset prices when there is a non-fundamental shock to investment stabilises both the asset price and inflation.

Keywords: Investment; Asset Prices; Inflation Targeting; Taylor Rule; Rational Expectations. (search for similar items in EconPapers)
Date: 2002
New Economics Papers: this item is included in nep-fin and nep-mon
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Citations: View citations in EconPapers (7)

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Working Paper: Monetary policy, investment and non-fundamental shocks (2003)
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