THE IMPACT OF ASSET PRICES AND THEIR INFORMATION VALUE FOR MONETARY POLICY

In this paper we explore the contribution that assetprices appear to make to fluctuations in the economyand to inflation, and hence to monetary policy,using a large international panel for the 1970-2008period. We show that house prices are importantin the determination of economic activity, andtherefore to monetary policy, but that stock marketprices, while offering information in many periods,form a rather weaker and less well determined linkage.Moreover, the effects are asymmetric over thecourse of the economic cycle. Using an augmentedTaylor rule, we go on to show that monetary policyhas not reacted much to asset prices but that longruninterest rates are clearly affected by house priceinflation. Relationships tend to be weaker in recentyears, probably as a result of greater stability in outputgrowth and inflation. Nevertheless, our resultssuggest that central banks would do well to considerasset prices in deciding monetary policy.