Determinacy, Stock Market Dynamics and Monetary Policy Inertia

11 Pages Posted: 29 Nov 2008

See all articles by Damjan Pfajfar

Damjan Pfajfar

Board of Governors of the Federal Reserve System

Emiliano Santoro

University of Copenhagen - Department of Economics

Date Written: November 28, 2008

Abstract

This note deals with the stability properties of an economy where the central bank is concerned with stock market developments. We introduce a Taylor rule reacting to stock price growth rates along with inflation and output gap in a New-Keynesian setup. We explore the performance of this rule from the vantage of equilibrium uniqueness. We show that this reaction function is isomorphic to a rule with an interest rate smoothing term, whose magnitude increases in the degree of aggressiveness towards asset prices growth. As shown by Bullard and Mitra (2007, Determinacy, learnability, and monetary policy inertia, Journal of Money, Credit and Banking 39, 1177-1212) this feature of monetary policy inertia can help at alleviating problems of indeterminacy.

Keywords: monetary policy, asset prices, rational expectation equilibrium uniqueness

JEL Classification: E31, E32, E52

Suggested Citation

Pfajfar, Damjan and Santoro, Emiliano, Determinacy, Stock Market Dynamics and Monetary Policy Inertia (November 28, 2008). Univ. of Copenhagen Dept. of Economics Discussion Paper No. 08-30. Available at SSRN: https://ssrn.com/abstract=1308578 or http://dx.doi.org/10.2139/ssrn.1308578

Damjan Pfajfar

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Emiliano Santoro (Contact Author)

University of Copenhagen - Department of Economics ( email )

Ă˜ster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

Register to save articles to
your library

Register

Paper statistics

Downloads
52
Abstract Views
390
rank
379,515
PlumX Metrics