Please use this identifier to cite or link to this item: http://hdl.handle.net/1893/9205
Appears in Collections:Economics Journal Articles
Peer Review Status: Refereed
Title: Optimal monetary policy and asset price misalignments
Author(s): Kontonikas, Alexandros
Montagnoli, Alberto
Contact Email: alberto.montagnoli@stir.ac.uk
Keywords: Monetary policy
Asset prices
Issue Date: Nov-2006
Date Deposited: 24-Sep-2012
Citation: Kontonikas A & Montagnoli A (2006) Optimal monetary policy and asset price misalignments. Scottish Journal of Political Economy, 53 (5), pp. 636-654. https://doi.org/10.1111/j.1467-9485.2006.00398.x
Abstract: This paper analyses the relationship between monetary policy and asset prices in the context of optimal policy rules. The transmission mechanism is represented by a linearized rational expectations model augmented for the effect of asset prices on aggregate demand. Stabilization objectives are represented by a discounted quadratic loss function penalizing inflation and output gap volatility. Asset prices are allowed to deviate from their intrinsic value due to momentum trading. We find that in the presence of wealth effects and inefficient markets, asset price misalignments from their fundamentals should be included in the optimal interest rate reaction function.
DOI Link: 10.1111/j.1467-9485.2006.00398.x
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