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Asset Prices and Monetary Policy

Author

Listed:
  • Ichiro Fukunaga

    (Research and Statistics Department, Bank of Japan (E-mail: ichirou.fukunaga@boj.or.jp))

  • Masashi Saito

    (Research and Statistics Department, Bank of Japan (E-mail: masashi.saitou@boj.or.jp))

Abstract
How should central banks take into account movements in asset prices in the conduct of monetary policy? We provide an analysis to address this issue using a dynamic stochastic general equilibrium model incorporating both price rigidities and financial market imperfections. Our findings are twofold. First, in the presence of these two sources of distortion in the economy, central banks face a policy trade-off between stabilizing inflation and the output gap. With this trade-off, central banks could strike a better balance between both objectives if they took variables other than inflation, such as asset prices, into consideration. Second, these benefits decrease when central banks rely on limited information about the underlying sources of asset price movements and cannot judge which part of the observed asset price movements reflects inefficiencies in the economy.

Suggested Citation

  • Ichiro Fukunaga & Masashi Saito, 2009. "Asset Prices and Monetary Policy," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 27(1), pages 143-170, November.
    • Handle: RePEc:ime:imemes:v:27:y:2009:i:1:p:143-170
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    References listed on IDEAS

    as
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    Cited by:

    1. Ravn Søren Hove, 2012. "Has the Fed Reacted Asymmetrically to Stock Prices?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-36, June.

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    More about this item

    Keywords

    Asset prices; Monetary policy; Financial frictions; Policy trade-offs;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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