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Monetary policy and asset prices: to respond or not?
Author(s) -
Akram Q. Farooq,
Bärdsen Gunnar,
Eitrheim Øyvind
Publication year - 2006
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.298
Subject(s) - economics , monetary policy , interest rate , exchange rate , volatility (finance) , monetary economics , equity (law) , asset (computer security) , real economy , nominal interest rate , econometrics , real interest rate , macroeconomics , computer security , political science , law , computer science
We investigate whether there is a case for asset prices in interest rates rules within a small econometric model of the Norwegian economy, modelling the interdependence of the real economy, credit and three classes of asset prices: housing prices, equity prices and the nominal exchange rate. We compare the performance of simple interest rate rules that allow for additional response to movements in asset prices to the performance of more standard monetary policy rules. We find that including housing and/or equity prices in the policy rules improve macroeconomic performance in terms of both nominal and real economic stability. In contrast, responding to exchange rate fluctuations seems less effective to this end, mainly because the instrument must be used quite actively, which contributes to higher volatility in general. Copyright © 2006 John Wiley & Sons, Ltd.