Asset Price and the Optimal Monetary Policy: Model and Simulation

2011 ◽  
Vol 422 ◽  
pp. 466-469
Author(s):  
Hai Cheng Peng ◽  
Lu Li
Keyword(s):  
Monetary Policy ◽  
Asset Price ◽  
Price Volatility ◽  
Reaction Function ◽  
Optimal Monetary Policy ◽  
Policy Objective ◽  
Policy Model ◽  
Model And Simulation ◽  
Wide Range ◽  
Decision Making Model

The validity and merits of the monetary policy is reflected in the level of the attainment of its ultimate goal. We build up a decision-making model of central bank and deduce the optimal money supply reaction function of considering and ignoring asset price. In order to clarify the relationship between the optimal monetary policy and asset price volatility, we simulate the macroeconomic performance of optimal reaction function of considering and ignoring asset price in a wide range of monetary policy objective. We conclude that monetary policy should respond to volatility of asset price directly.

FINANCIAL STABILITY AND MONETARY POLICY REACTION FUNCTION FOR SOUTH ASIAN COUNTRIES: AN ECONOMETRIC APPROACH

2019 ◽  
pp. 1-30
Author(s):  
SAMIA NASREEN ◽  
SOFIA ANWAR
Keyword(s):  
Monetary Policy ◽  
South Asian ◽  
Financial Stability ◽  
Central Banks ◽  
Series Data ◽  
Reaction Function ◽  
Asian Countries ◽  
Policy Objective ◽  
Monetary Policy Reaction Function ◽  
Policy Reaction Function

This study empirically investigates a monetary policy reaction function for South Asian economies by incorporating financial stability as an additional policy objective in the central bank’s loss function. Empirical results are estimated by applying auto-regressive distributed lag (ARDL) approach to cointegration and vector autoregressive (VAR) approach using time-series data of five South Asian countries, namely, Pakistan, India, Bangladesh, Nepal and Sri Lanka. Estimated results indicate that monetary policy significantly reacts to the level of financial stability in all countries. The result further suggests that central banks would tighten monetary policy if output gap widens and exchange rate depreciate. In addition, central banks of Pakistan and India do not respond significantly to inflation gap.

scholarly journals Monetary Policy and Rational Asset Price Bubbles

2014 ◽  
Vol 104 (3) ◽  
pp. 721-752 ◽  
Author(s):  
Jordi Galí
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Aggregate Demand ◽  
Asset Price ◽  
Optimal Monetary Policy ◽  
Monetary Policies ◽  
Asset Price Bubbles ◽  
Price Bubbles ◽  
Price Bubble ◽  
The Impact

I examine the impact of alternative monetary policy rules on a rational asset price bubble, through the lens of an overlapping generations model with nominal rigidities. A systematic increase in interest rates in response to a growing bubble is shown to enhance the fluctuations in the latter, through its positive effect on bubble growth. The optimal monetary policy seeks to strike a balance between stabilization of the bubble and stabilization of aggregate demand. The paper's main findings call into question the theoretical foundations of the case for “leaning against the wind” monetary policies. (JEL E13, E32, E44, E52, G12)

scholarly journals OPTIMAL MONETARY POLICY AND ASSET PRICE MISALIGNMENTS

2006 ◽  
Vol 53 (5) ◽  
pp. 636-654 ◽  
Author(s):  
Alexandros Kontonikas ◽  
Alberto Montagnoli
Keyword(s):  
Monetary Policy ◽  
Asset Price ◽  
Optimal Monetary Policy

scholarly journals Asset Price Learning and Optimal Monetary Policy

2019 ◽  
Vol 2019 (1236r) ◽  
pp. 1-60
Author(s):  
Colin Caines ◽  
◽  
Fabian Winkler
Keyword(s):  
Monetary Policy ◽  
Asset Price ◽  
Optimal Monetary Policy

A NOTE ON MONETARY POLICY, ASSET PRICES, AND MODEL UNCERTAINTY

2012 ◽  
Vol 16 (5) ◽  
pp. 777-790 ◽  
Author(s):  
Meixing Dai ◽  
Eleftherios Spyromitros
Keyword(s):  
Monetary Policy ◽  
Financial Markets ◽  
Asset Prices ◽  
Inflation Rate ◽  
Asset Price ◽  
Optimal Monetary Policy ◽  
Macroeconomic Dynamics ◽  
High Preference ◽  
And Performance ◽  
The Cost

Using a macroeconomic model with asset prices, we analyze how optimal monetary policy and macroeconomic dynamics and performance are affected by a central bank's desire to be robust against model misspecifications. We show that a higher central bank preference for robustness implies a more aggressive reaction of the nominal interest rate to the expected future inflation rate and inflation shocks. The dynamic stability of the equilibrium is not modified for a sufficiently high preference for robustness. However, the speed of dynamic convergence is lower under robust control compared to a benchmark case without it and implies supplementary economic costs. Finally, an increase in the preference for robustness comes at the cost of higher macroeconomic and financial volatility in the presence of inflation shocks. It has no effect on the reaction of inflation, output gap, and asset price gap to shocks affecting goods and financial markets.

scholarly journals Monetary Policy Dynamics in the United States

2021 ◽  
Vol 4 (1) ◽  
pp. 14-30
Author(s):  
Oladimeji T. Shodipe ◽  
Olatunji Abdul Shobande
Keyword(s):  
United States ◽  
Monetary Policy ◽  
Structural Breaks ◽  
Linear Structure ◽  
The United States ◽  
Policy Objective ◽  
Policy Model ◽  
Policy Dynamics ◽  
Smoothing Process ◽  
Output Gaps

Abstract The recognised approach to designing an optimal monetary policy model is based on the central bank’s ability to mitigate losses using a quadratic criterion subject to the linear structure of the economy. This study examines the United States Federal Reserve’s (Fed) monetary policy in different economic environments. It provides an empirical solution to the central bank’s optimisation problem when preferences are asymmetric in both in˛ation and output gaps. The study tested for structural breaks and uncovered potential evidence of nonlinearities in the Fed’s reaction function, which provides more information on policy objective. The empirical evidence suggests that the Fed’s policy rate differs in these periods. This strongly indicates the presence of asymmetry. Further evidence suggests that the predictive power of the estimated model increases when a smoothing process is allowed.

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