Determinacy, Stock Market Dynamics and Monetary Policy Inertia
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Determinacy, Stock Market Dynamics and Monetary Policy Inertia. / Pfajfar, Damjan; Santoro, Emiliano.
Department of Economics, University of Copenhagen, 2008.Research output: Working paper › Research
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TY - UNPB
T1 - Determinacy, Stock Market Dynamics and Monetary Policy Inertia
AU - Pfajfar, Damjan
AU - Santoro, Emiliano
N1 - JEL lClassification: E31, E32, E52
PY - 2008
Y1 - 2008
N2 - This note deals with the stability properties of an economy where the central bank is concerned with stock market developments. We introduce a Taylor rule reacting to stock price growth rates along with inflation and output gap in a New-Keynesian setup. We explore the performance of this rule from the vantage of equilibrium uniqueness. We show that this reaction function is isomorphic to a rule with an interest rate smoothing term, whose magnitude increases in the degree of aggressiveness towards asset prices growth. As shown by Bullard and Mitra (2007, Determinacy, learnability, and monetary policy inertia, Journal of Money, Credit and Banking 39, 1177-1212) this feature of monetary policy inertia can help at alleviating problems of indeterminacy.
AB - This note deals with the stability properties of an economy where the central bank is concerned with stock market developments. We introduce a Taylor rule reacting to stock price growth rates along with inflation and output gap in a New-Keynesian setup. We explore the performance of this rule from the vantage of equilibrium uniqueness. We show that this reaction function is isomorphic to a rule with an interest rate smoothing term, whose magnitude increases in the degree of aggressiveness towards asset prices growth. As shown by Bullard and Mitra (2007, Determinacy, learnability, and monetary policy inertia, Journal of Money, Credit and Banking 39, 1177-1212) this feature of monetary policy inertia can help at alleviating problems of indeterminacy.
KW - Faculty of Social Sciences
KW - asset prices
KW - rational expectation
KW - equilibrium uniqueness
M3 - Working paper
BT - Determinacy, Stock Market Dynamics and Monetary Policy Inertia
PB - Department of Economics, University of Copenhagen
ER -
ID: 8783534