Monetary policy, investment and non-fundamental shocks

• Author(s): Alexandre, Fernando
• Date: 2002
• Persistent ID: http://hdl.handle.net/1822/1306
• Origin: RepositóriUM - Universidade do Minho
• Subject(s): Investment; Asset prices; Inflation targeting; Taylor rule; Rational expectations
• Document Type: Research paper
• Language: English

Description

Using a sticky price model with endogenous investment and adjustment costs we analyse the benefits of monetary policy reacting to asset prices, when investment is under the influence of a non-fundamental shock, both for inflation-forecast targeting rules and for Taylor rules. We conclude that in this context there are benefits from reacting to asset prices that result from a more stable output gap, which is the consequence of a much lower volatility in firms’ investment. However, welfare gains depend on the source of asset price movements. Reacting to asset prices when there is a non-fundamental shock to investment stabilises both the asset price and inflation.