Monetary Policy Rules, Asset Prices and Exchange Rates

36 Pages Posted: 6 Jan 2004

See all articles by Jagjit S. Chadha

Jagjit S. Chadha

University of St. Andrews - School of Management

Lucio Sarno

University of Cambridge - Judge Business School; Centre for Economic Policy Research (CEPR)

Giorgio Valente

Hong Kong Institute for Monetary and Financial Research (HKIMR)

Multiple version iconThere are 2 versions of this paper

Date Written: November 2003

Abstract

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.

Keywords: Interest rate rules, asset prices, exchange rates, monetary policy

JEL Classification: E40, E44, E52, E58

Suggested Citation

Chadha, Jagjit S. and Sarno, Lucio and Valente, Giorgio, Monetary Policy Rules, Asset Prices and Exchange Rates (November 2003). CEPR Discussion Paper No. 4114. Available at SSRN: https://ssrn.com/abstract=480603

Jagjit S. Chadha

University of St. Andrews - School of Management ( email )

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St. Andrews, Fife KY16 9SS
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Lucio Sarno (Contact Author)

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Giorgio Valente

Hong Kong Institute for Monetary and Financial Research (HKIMR) ( email )

One Pacific Place, 10th Floor
88 Queensway
Hong Kong
China

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