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Fundamental Paper Wealth and Monetary Policy

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  • Junning Cai

    (University of Hawaii at Manoa)

Abstract

This paper articulates three insights regarding asset prices and monetary policy: (1) Asset price appreciation due to monetary expansion, despite its “paper” wealth nature, tends to make current consumers as a whole wealthier; (2) the wealth effect of monetary policy (on consumption) is negatively correlated with Tobin’s q effect (on investment), which positively depends on investment elasticity; and (3) the soundness of asset market performances does not depend on whether they are fundamental or not, but on their compatibility with the AD-AS balance in the long run. These basic insights and their implications reveal some limitations of monetary policy as a stabilization policy, clarify some misperceptions on fundamental asset prices, and provide a rationale for monetary policy to react directly to asset market performances.

Suggested Citation

  • Junning Cai, 2003. "Fundamental Paper Wealth and Monetary Policy," Macroeconomics 0309001, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpma:0309001
    Note: Type of Document - pdf; prepared on pc; to print on HP/PostScript/Franciscan monk; pages: 46; figures: included
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    References listed on IDEAS

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    Cited by:

    1. Junning Cai, 2004. "Liquidity Trap Prevention and Escape: A Simple Proposition," Macroeconomics 0402033, University Library of Munich, Germany.
    2. Junning Cai & Byron Gangnes, 2004. "Open Capital Account: Concrete Wealth or Paper Wealth," International Finance 0401002, University Library of Munich, Germany.

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    More about this item

    Keywords

    Fundamental Paper Wealth; Wealth Effect; Bubbles; Monetary Policy;
    All these keywords.

    JEL classification:

    • E - Macroeconomics and Monetary Economics
    • G - Financial Economics

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