Working Paper: NBER ID: w8617
Authors: Frederic S. Mishkin
Abstract: This paper surveys the transmission mechanisms of monetary policy beyond the standard interest rate channel by focusing on how monetary policy affects the economy through other asset prices. It outlines how the monetary transmission mechanisms operating through stock prices, real estate prices, and exchange rates affect which affect investment and consumption decisions of both firms and households. Given the role that asset prices play on the transmission mechanism, central banks have been often tempted to use them as targets of monetary policy. This paper shows that despite the significance of asset prices in the conduct of monetary policy, targeting asset prices by central banks is likely to lead to worse economic outcomes and might even erode the support for their independence.
Keywords: No keywords provided
JEL Codes: E52; E40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Stock market prices (G10) | Investment (G31) |
| Asset prices (G19) | Firm financial health (G32) |
| Firm financial health (G32) | Borrowing capacity (G51) |
| Borrowing capacity (G51) | Investment (G31) |
| Asset prices (G19) | Household wealth (G59) |
| Household wealth (G59) | Consumption (E21) |
| Asset prices (G19) | Household liquidity (G59) |
| Household liquidity (G59) | Spending decisions (H61) |