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Asset Prices And Monetary Policy On A Sticky-Price Economy With Financial Frictions

Date Added: Nov 2010
Format: PDF

A recent study shows that equilibrium indeterminacy arises if monetary policy responds to asset prices, especially share prices, in a sticky-price economy. The authors show that equilibrium indeterminacy never arise if the working capital of firms is subject to their asset values by financial frictions. Should monetary policy respond to asset prices? There is a large number of the literature on this question. For example, the unimportance of responding to asset prices is reminiscent of the findings of Bernanke and Gertler (2001) and Gilchrist and Leahy (2002).