Asset Markets and Monetary Policy

27 Pages Posted: 8 Oct 2009 Last revised: 7 Dec 2009

See all articles by Eckhard Platen

Eckhard Platen

University of Technology, Sydney (UTS) - Finance Discipline Group; University of Technology Sydney, School of Mathematical and Physical Sciences; Financial Research Network (FIRN)

Willi Semmler

The New School - Department of Economics; Universitaet Bielefeld; IIASA

Date Written: June 5, 2009

Abstract

Monetary policy has pursued the concept of inflation targeting. This has been implemented in many countries. Here interest rates are supposed to respond to an inflation gap and output gap. Yet, recently monetary policy, in particular in the US after the subprime and the credit crises, the economy was challenged by severe disruptions of the financial market. Subsequently, academics have been in search of a type of monetary policy that does allow to respond to the financial market. A model of this type should also show how the financial market responds to monetary policy. This paper derives a rule that explains how monetary authorities should set the short term interest rate with regard to asset prices, inflation rate, risk aversion, market volatility, and rate of consumption from capital. Interesting is that the inflation rate needs to have a certain minimal level. If this rule is applied properly, then the capital consumption rate will remain controlled and the inflation rate will be kept on a minimal possible level. Empirical evidence is provided that supports these findings.

Keywords: interest rates, portfolio optimization, consumption, inflation, monetary policy, benchmark approach

JEL Classification: G10, G13

Suggested Citation

Platen, Eckhard and Semmler, Willi, Asset Markets and Monetary Policy (June 5, 2009). Available at SSRN: https://ssrn.com/abstract=1485162 or http://dx.doi.org/10.2139/ssrn.1485162

Eckhard Platen

University of Technology, Sydney (UTS) - Finance Discipline Group ( email )

Broadway
GPO Box 123
Sydney, NSW 2007, 2007
Australia
+61 2 9514 7759 (Phone)

HOME PAGE: http://datasearch.uts.edu.au/business/finance/staff/StaffDetails.cfm?UnitStaffId=90

University of Technology Sydney, School of Mathematical and Physical Sciences ( email )

P.O. Box 123
Broadway
Sydney, New South Wales 2007
Australia
+61 (02) 9514 2271 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Willi Semmler (Contact Author)

The New School - Department of Economics ( email )

65 Fifth Avenue
New York, NY 10003
United States

HOME PAGE: http://www.newschool.edu/nssr/faculty/?id=4e54-6b79-4e41-3d3d

Universitaet Bielefeld ( email )

Universit├Ątsstra├če 25
Bielefeld, NRW
Germany

IIASA ( email )

Schlossplatz 1
Laxenburg/Austria, A-2361
Austria

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