Monetary Policy and Asset Prices: Does 'Benign Neglect' Make Sense?

Bordo, Michael D.; Jeanne, Olivier

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Monetary Policy and Asset Prices: Does 'Benign Neglect' Make Sense?

IMF Working Paper No. 02/225

28 Pages Posted: 14 Feb 2006

See all articles by Michael D. Bordo

Michael D. Bordo

Rutgers University, New Brunswick - Department of Economics; National Bureau of Economic Research (NBER)

Olivier Jeanne

International Monetary Fund (IMF) - Research Department; Ecole Nationale des Ponts et Chaussees (ENPC); Centre for Economic Policy Research (CEPR)

Date Written: December 2002

Abstract

The link between monetary policy and asset price movements has been of perennial interest to policymakers. In this paper, we consider the potential case for preemptive monetary restrictions when asset price reversals can have serious effects on real output. First, we present some stylized facts on boom-bust dynamics in stock and property prices in developed economies. We then discuss the case for a preemptive monetary policy in the context of a stylized model. We find that the optimal policy depends on the economic conditions in a complex, nonlinear way and cannot be summarized by a simple policy rule of the type considered in the inflation-targeting literature.

Keywords: Monetary policy, asset prices, credit crunch, Taylor rule, bubbles, new economy

JEL Classification: E52, N20

Suggested Citation: Suggested Citation

Bordo, Michael D. and Jeanne, Olivier, Monetary Policy and Asset Prices: Does 'Benign Neglect' Make Sense? (December 2002). IMF Working Paper No. 02/225, Available at SSRN: https://ssrn.com/abstract=880918