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Financial Variables and the Conduct of Monetary Policy

Author

Listed:
  • Goodhart, Charles

    (London School of Economics)

  • Hofmann, Boris

    (Zentrum für Europäische Integrationsforschung)

Abstract

This paper analyses the role of financial variables in the conduct of monetary policy. In the baseline model for the analysis of interest rules, the inflation rate depends on the output gap, which is solely determined by its own lags and the lagged short-term real interest rate. However, from a theoretical point of view there are several other financial variables which may affect aggregate demand, and should therefore be taken into account in the estimation of an output gap equation. In order to assess the importance of financial variables such as asset prices and monetary aggregates for aggregate demand, we estimate a small structural model for 17 developed countries using quarterly data spanning 1973 - 1998. The results indicate that the effect of other financial variables, especially property and share prices, on the output gap is highly significant. It appears that in almost all of the countries in our data set it is necessary to control for the effect of other financial variables on the output gap in order to find a significant effect for monetary policy.

Suggested Citation

  • Goodhart, Charles & Hofmann, Boris, 2000. "Financial Variables and the Conduct of Monetary Policy," Working Paper Series 112, Sveriges Riksbank (Central Bank of Sweden).
    • Handle: RePEc:hhs:rbnkwp:0112
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    File URL: http://www.riksbank.com/upload/4587/WP_112.pdf
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    References listed on IDEAS

    as
    1. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393, Elsevier.
    2. Glenn Rudebusch & Lars E.O. Svensson, 1999. "Policy Rules for Inflation Targeting," NBER Chapters, in: Monetary Policy Rules, pages 203-262, National Bureau of Economic Research, Inc.
    3. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1.
    4. Ben S. Bernanke & Mark Gertler, 1999. "Monetary policy and asset price volatility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 77-128.
    5. Shiratsuka, Shigenori, 1999. "Asset Price Fluctuation and Price Indices," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 17(3), pages 103-128, December.
    6. Hiroshi Shibuya, 1992. "Dynamic Equilibrium Price Index: Asset Price and Inflation," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 10(1), pages 95-109, February.
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    More about this item

    Keywords

    Monetary policy; Financial Variables;

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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