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Monetary Policy and Asset Prices: Does ‘Benign Neglect’ Make Sense?
Author(s) -
Bordo Michael D.,
Jeanne Olivier
Publication year - 2002
Publication title -
international finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.458
H-Index - 39
eISSN - 1468-2362
pISSN - 1367-0271
DOI - 10.1111/1468-2362.00092
Subject(s) - stylized fact , economics , monetary policy , collateral , monetary economics , asset (computer security) , stock (firearms) , inflation targeting , inflation (cosmology) , macroeconomics , interest rate , finance , mechanical engineering , physics , computer security , theoretical physics , computer science , engineering
The link between monetary policy and asset price movements has been of perennial interest to policy makers. In this paper we consider the potential case for pre–emptive monetary restrictions when asset price reversals can have serious effects on real output. First, we present some stylized facts on boom?bust dynamics in stock and property prices in developed economies. We then discuss the case for a pre–emptive monetary policy in the context of a stylized framework with collateral constraints in the productive sector. We find that whether such a policy is warranted depends on the economic conditions in a complex, nonlinear way. The optimal policy cannot be summarized by a simple policy rule of the type considered in the inflation–targeting literature.