Monetary Policy and Asset Prices: Does "Benign Neglect" Make Sense?

December 1, 2002

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The link between monetary policy and asset price movements has been of perennial interest to policymakers. In this paper, we consider the potential case for preemptive 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 preemptive monetary policy in the context of a stylized model. We find that the optimal policy depends on the economic conditions in a complex, nonlinear way and cannot be summarized by a simple policy rule of the type considered in the inflation-targeting literature.

Subject: Asset prices, Business cycles, Credit, Economic growth, Land prices, Money, Price indexes, Prices

Keywords: asset market boom, asset price, asset prices, Asset prices, bubbles, Business cycles, Credit, credit crunch, Land prices, Monetary policy, moving average, new economy, Price indexes, price level, proactive monetary policy, share price, Taylor rule, WP

Pages:
27
Volume:
2002
DOI:
https://doi.org/10.5089/9781451875362.001
Issue:
225
Series:
Working Paper No. 2002/225
Stock No:
WPIEA2252002
ISBN:
9781451875362
ISSN:
1018-5941

IMF’s Work

RESOURCES

TOPICS

Flagship Publications

Other Publications

IMF reports and publications by country

Regional Offices

All News

See Also

For Journalists

Press Center

RESOURCES

FLAGSHIPS

KEY SERIES

IMF NOTES

Loading component...

IMF Working Papers