Monetary Policy Rules, Asset Prices and Exchange Rates
Jagjit S. Chadha
University of Saint Andrews - School of Economics & Management
City University London - Sir John Cass Business School; Centre for Economic Policy Research (CEPR)
Essex Business School
CEPR Discussion Paper No. 4114
We examine empirically whether asset prices and exchange rates may be admitted into a standard interest rate rule, using data for the US, the UK and Japan since 1979. Asset prices and exchange rates can be employed as information variables for a standard 'Taylor-type' rule or as arguments in an augmented interest rate rule. Our empirical evidence, based on measures of the output gap proxied by marginal costs calculations, suggests that monetary policy-makers may use asset prices and exchange rates not only as part of their information set for setting interest rates, but also to set interest rates to offset deviations of asset prices or exchange rates from their equilibrium levels. These results are open to several alternative interpretations.
Number of Pages in PDF File: 36
Keywords: Interest rate rules, asset prices, exchange rates, monetary policy
JEL Classification: E40, E44, E52, E58working papers series
Date posted: January 6, 2004
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