Determinacy, Stock Market Dynamics and Monetary Policy Inertia

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 -