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Title: Monetary Policy Rules, Asset Prices and Exchange Rates

Author(s): Jagjit S Chadha, Lucio Sarno and Giorgio Valente

Publication Date: November 2003

Keyword(s): asset prices, exchange rates, interest rate rules and monetary policy

Programme Area(s): International Macroeconomics

Abstract: We examine empirically whether asset prices and exchange rates may be admitted into a standard interest rate rule, using data for the US, the UK 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 costs 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.

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Bibliographic Reference

Chadha, J, Sarno, L and Valente, G. 2003. 'Monetary Policy Rules, Asset Prices and Exchange Rates'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=4114