Should the central bank act to prevent "excessive" asset price dynamics or should it wait until the boom spontaneously turns into a crash and intervene afterwards to attenuate the fallout on the real economy? The standard "three equation" New Keynesian framework is inadequate to analyse this issue for the very simple reason that asset prices are not explicitly included in the model. There are two straightforward ways to take into account asset price dynamics in this framework. First of all, the objective function of the central bank - usually defined in terms of inflation and the output gap - could be "augmented" to take into account asset price inflation. Second, expected asset price inflation can affect the IS curve through a wealth effect. In this paper we follow a different route. In our model in fact, the expected asset price dynamics will be eventually incorporated into the NK Phillips curve. This is due to the assumption of a cost channel for monetary policy which is activated whenever monetary policy affects asset prices and dividends. In fact they determine the cost of external finance in the simple "equity only" financing model we consider, abstracting for simplicity from internal funds and the credit market

Assenza, T., Delli Gatti, D., Berardi, M., Asset prices and monetary policy: A new view of the cost channel, Working paper, in CeNDEF working paper#09-17, (Amsterdam, 09-09 December 2009), CeNDEF working paper, Amsterdam 2009: 1-89 [http://hdl.handle.net/10807/32070]

Asset prices and monetary policy: A new view of the cost channel

Assenza, Tiziana;Delli Gatti, Domenico;Berardi, Michele
2009

Abstract

Should the central bank act to prevent "excessive" asset price dynamics or should it wait until the boom spontaneously turns into a crash and intervene afterwards to attenuate the fallout on the real economy? The standard "three equation" New Keynesian framework is inadequate to analyse this issue for the very simple reason that asset prices are not explicitly included in the model. There are two straightforward ways to take into account asset price dynamics in this framework. First of all, the objective function of the central bank - usually defined in terms of inflation and the output gap - could be "augmented" to take into account asset price inflation. Second, expected asset price inflation can affect the IS curve through a wealth effect. In this paper we follow a different route. In our model in fact, the expected asset price dynamics will be eventually incorporated into the NK Phillips curve. This is due to the assumption of a cost channel for monetary policy which is activated whenever monetary policy affects asset prices and dividends. In fact they determine the cost of external finance in the simple "equity only" financing model we consider, abstracting for simplicity from internal funds and the credit market
2009
Inglese
CeNDEF working paper#09-17
CeNDEF working paper
Amsterdam
Working paper
9-dic-2009
9-dic-2009
Assenza, T., Delli Gatti, D., Berardi, M., Asset prices and monetary policy: A new view of the cost channel, Working paper, in CeNDEF working paper#09-17, (Amsterdam, 09-09 December 2009), CeNDEF working paper, Amsterdam 2009: 1-89 [http://hdl.handle.net/10807/32070]
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10807/32070
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