The Impact of Asset Prices and Their Information Value for Monetary Policy1

Using panel data for the EU and Norway since 1970, we explore the contribution that asset prices appear to make to fluctuations in the economy, to inflation and hence to monetary policy. House prices are important in economic activity and monetary policy, but stock market prices form a weaker and less well-determined linkage, particularly since the formation of the euro area. The effects are asymmetric over the economic cycle. Using an augmented Taylor rule we show that monetary policy has not reacted much to asset prices, but long-run interest rates are clearly affected by house price inflation. Central banks could consider asset prices in deciding monetary policy.