# Monetary Policy Should Consider Asset Prices

944 WordsMay 4, 20174 Pages
To look into the issue of whether monetary policy should consider asset prices in particular their appreciation, we lay out a model in which we corporate a role for asset prices in particular bubbles. To carry this forth, we lay the paper out into 3 sections, where in section one we summarize our model and findings, section two we look into the model in further detail. In section three we evaluate four scenarios in which a monetary policy maker could face in a given economy, and in the last part we look into the historic prevalence of monetary action to asset prices and what they did during the housing bubble and 2017. In particular the last part will look into what the Fed did. By the end of our analysis, we acknowledge that one rule does…show more content…
mean and standard deviation Step 3: To estimate the net benefits to the policy setter, of responding to asset prices, when there exists uncertainty. Evaluate the uncertainty parameter. Outcome: In the presence of uncertainty about the underlying macroeconomic model, Central Banks tend not to respond to asset prices, in the absence of it they prefer to respond. Aim 2: Use payoff functions to estimate net benefit of responding. Approach 2: We define uncertainty as the possibility of asset price variable coefficients being zero ( φ = 0, β = 0). We can now lay out the possibilities a policy maker faces by the following: True macroeconomic structure AP matter AP do not matter L*1,1 L1,2 L2,1 L*2,2 Monetary AP matter Authority’s view AP do not matter • The optimum reaction functions which minimize the problem faced by the policy setter and achieve the minimum loss are: L*1,1 and L*2,2 where the policy setter correctly assumes, when asset prices do and do not play a role in the economy, respectively. • L1,2 and L 2,1 are the loss function values, when the policy setter fails to correctly assume when asset prices do and do not play a fundamental role in the economy, respectively. Given the perception, the policy setter uses the reaction function by assuming asset prices play a role (when