Essays on Economic Policy (ESPE in Spanish) - The Impact of Asset Prices and their Information Value for Monetary Policy
En la revista Ensayos sobre Política Económica (ESPE) divulgamos los resultados y las propuestas de política que surgen de investigaciones académicas realizadas en el Banco de la República. Cuando nos lea, tenga siempre presente que el contenido de nuestros artículos, así como los análisis y conclusiones que de ellos se derivan, son exclusiva responsabilidad de sus autores. El material divulgado en nuestra revista ESPE no compromete ni representa la opinión del Banco de la República ni la de su Junta Directiva.
In this paper we explore the contribution that asset prices appear to make to fluctuations in the economy and to inflation, and hence to monetary policy, using a large international panel for the 1970–2008 period. We show that house prices are important in the determination of economic activity, and therefore to monetary policy, but that stock market prices, while offering information in many periods, form a rather weaker and less well determined linkage. Moreover, the effects are asymmetric over the course of the economic cycle. Using an augmented Taylor rule, we go on to show that monetary policy has not reacted much to asset prices but that longrun interest rates are clearly affected by house price inflation. Relationships tend to be weaker in recent years, probably as a result of greater stability in output growth and inflation. Nevertheless, our results suggest that central banks would do well to consider asset prices in deciding monetary policy.
