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Trend inflation, asset prices and monetary policy

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  • Kengo Nutahara

Abstract

The main objective of this paper is to investigate monetary policy response to asset price in a sticky price economy where the trend inflation rate is non-zero. We find that monetary policy response to asset price is helpful for achieving equilibrium determinacy if the trend inflation is negative (i.e., deflation) and sufficiently low. If this is not the case, monetary policy response to asset price becomes a source of equilibrium indeterminacy. We also find that monetary policy response to asset price can be helpful for equilibrium determinacy even if the trend inflation is positive in the case where the nominal wage is also sticky, and the parameter values are consistent with recent micro evidence.

Suggested Citation

  • Kengo Nutahara, 2021. "Trend inflation, asset prices and monetary policy," CIGS Working Paper Series 21-004E, The Canon Institute for Global Studies.
    • Handle: RePEc:cnn:wpaper:21-004e
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    References listed on IDEAS

    as
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    9. Kengo Nutahara, 2014. "What Asset Prices Should Be Targeted by a Central Bank?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(4), pages 817-836, June.
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