The Transmission Mechanism and the Role of Asset Prices in Monetary Policy

23 Pages Posted: 29 Nov 2001 Last revised: 25 Oct 2010

See all articles by Frederic S. Mishkin

Frederic S. Mishkin

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: December 2001

Abstract

This paper surveys the transmission mechanisms of monetary policy beyond the standard interest rate channel by focusing on how monetary policy affects the economy through other asset prices. It outlines how the monetary transmission mechanisms operating through stock prices, real estate prices, and exchange rates affect which affect investment and consumption decisions of both firms and households. Given the role that asset prices play on the transmission mechanism, central banks have been often tempted to use them as targets of monetary policy. This paper shows that despite the significance of asset prices in the conduct of monetary policy, targeting asset prices by central banks is likely to lead to worse economic outcomes and might even erode the support for their independence.

Suggested Citation

Mishkin, Frederic S., The Transmission Mechanism and the Role of Asset Prices in Monetary Policy (December 2001). NBER Working Paper No. w8617, Available at SSRN: https://ssrn.com/abstract=292516

Frederic S. Mishkin (Contact Author)

Columbia Business School - Finance and Economics ( email )

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National Bureau of Economic Research (NBER)

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