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We show that the benefits from reacting to misalignments in asset prices may disappear when there is noise in the variables to which the monetary policy instrument responds, and this noise is positively correlated across variables.
Recently it has often been claimed that globalization eases the job of central banks as it helps to tame inflation. This is used to argue that central banks (particularly the ECB, referring to the objectives as laid down in the EU Treaty) could or should reduce their efforts in the fight against inflation in favor of supporting the general economic policies of the governments. This paper takes a critical...
The first part of this paper surveys the literature on asset prices and monetary policy. We then consider the appropriate policy response to two types of shocks that are associated with how asset prices affect the economy. The first set of shocks are the ones whose primary impact lies in the future. These shocks affect the economy and asset prices through expectations of future growth. The second...
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