We examine empirically whether asset prices and exchange rates may be admitted into a standard interest rate rule, using data for the United States, the United Kingdom, and Japan since 1979. Asset prices and exchange rates can be employed as information variables for a standard “Taylor-type” rule or as arguments in an augmented interest rate rule. Our empirical evidence, based on measures of the output gap proxied by marginal cost calculations, suggests that monetary policy-makers may use asset prices and exchange rates not only as part of their information set for setting interest rates, but also to set interest rates to offset deviations of asset prices or exchange rates from their equilibrium levels. These results are open to several alternative interpretations.
Monetary Policy Rules, Asset Prices, and Exchange Rates
J. Chadha,Lucio Sarno,Giorgio Valente
Published 2003 in International Monetary Fund Staff Papers
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- Publication year
2003
- Venue
International Monetary Fund Staff Papers
- Publication date
2003-11-01
- Fields of study
Economics
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