Working Paper: NBER ID: w7559
Authors: Ben Bernanke; Mark Gertler
Abstract: We explore the implications of asset price volatility for the management of monetary policy. We show that it is desirable for central banks to focus on underlying inflationary pressures. Asset prices become relevant only to the extent they may signal potential inflationary or deflationary forces. Rules that directly target asset prices appear to have undesirable side effects. We base our conclusions on (i) simulation of different policy rules in a small scale macro model and (ii) a comparative analysis of recent U.S. and Japanese monetary policy.
Keywords: No keywords provided
JEL Codes: E5; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| asset price volatility (G19) | economic instability (E32) |
| nonfundamental factors (F29) | asset price volatility (G19) |
| asset price volatility (G19) | consumption (E21) |
| asset price volatility (G19) | investment (G31) |
| decline in asset values (G32) | available collateral for borrowing (G21) |
| available collateral for borrowing (G21) | credit conditions (F34) |
| credit conditions (F34) | economic growth (O49) |
| asset price booms (E32) | inflationary pressures (E31) |
| inflationary pressures (E31) | monetary policy response (E52) |
| asset prices (G19) | economic activity (E20) |