Q-Targeting in New Keynesian Models

37 Pages Posted: 5 May 2016

See all articles by Burkhard Heer

Burkhard Heer

University of Augsburg; CESifo (Center for Economic Studies and Ifo Institute)

Alfred Maussner

University of Augsburg - Faculty of Business and Economics

Halvor Ruf


Date Written: April 13, 2016


We consider optimal monetary policy in a model that integrates credit frictions in the standard New Keynesian model with sticky prices and wages as well as adjustment costs of capital. Different from traditional models with credit frictions such as Carlstrom and Fuerst (1998), the model is able to generate an anti-cyclical external finance premium as observed empirically in the US economy. Monetary policy is characterized by a Taylor rule according to which the nominal interest rate is set as a function of the deviation of the inflation rate from its target rate, the output gap, and Tobin’s q. The latter is measured by the relative price of newly installed capital. We show that monetary policy should optimally decrease interest rates with higher capital prices. However, the consideration of Tobin’s q implies only small welfare effects. These results are robust with respect to a more general Epstein and Zin (1989) welfare specification and to exogenous shifts to both the atemporal marginal rate of substitution between consumption and leisure as well as the households’ discounting behavior.

Keywords: asset prices, monetary policy, New Keynesian model, q targeting

JEL Classification: E120, E320, E520, G120

Suggested Citation

Heer, Burkhard and Maussner, Alfred and Ruf, Halvor, Q-Targeting in New Keynesian Models (April 13, 2016). CESifo Working Paper Series No. 5854, Available at SSRN: https://ssrn.com/abstract=2774651

Burkhard Heer (Contact Author)

University of Augsburg ( email )

Universitätsstr. 2
Augsburg, 86159

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679

Alfred Maussner

University of Augsburg - Faculty of Business and Economics ( email )

Universitaetsstr. 16
86135 Augsburg
+49 821 598 4187 (Phone)
+49 821 598 4231 (Fax)

Halvor Ruf


No Address Available
United States

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