Monetary Policy Rules, Asset Prices and Exchange Rates

Centre for Dynamic Macroeconomic Analysis Working Paper Series No. 0403

Posted: 9 May 2005

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: Asset Prices, exchange rates, interest rate rules, 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). Centre for Dynamic Macroeconomic Analysis Working Paper Series No. 0403. Available at SSRN: https://ssrn.com/abstract=717881

Jagjit S. Chadha

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

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Lucio Sarno (Contact Author)

University of Cambridge - Judge Business School ( email )

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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 )

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88 Queensway
Hong Kong
China

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