Monetary policy and the financial sector

- We study the interaction between financial sector variables and monetary policy.
- We use the New Keynesian framework of Bernanke, Gertler and Gilchrist (1999).
- Responding to asset prices does not increase the likelihood of indeterminacy.
- Responding to net worth increases the likelihood of determinacy.

In this paper we study whether central banks should react to financial sector variables in their policy rules. We find that responding to asset prices does not affect the determinacy conditions. However, responding to entrepreneurial net worth increases the likelihood of determinacy.