Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
987043 | Review of Economic Dynamics | 2007 | 20 Pages |
Abstract
Should monetary policy respond to asset prices? This paper analyzes this question from the vantage point of equilibrium determinacy. A central bank responding to asset prices is indirectly responding to firm profits. In a model with sticky prices, increases in inflation tend to lower firm profits so that a central bank responding to share prices implicitly weakens its overall response to inflation. This is the novel source of equilibrium indeterminacy highlighted in the paper.
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Charles T. Carlstrom, Timothy S. Fuerst,