Asset prices,nominal rigidities,and monetary policy |
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Institution: | 1. Federal Reserve Bank of Cleveland, Cleveland, OH 44101, USA;2. Bowling Green State University, Bowling Green, OH 43403, USA |
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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. |
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