آیا باید پاسخ سیاست های پولی به قیمت دارایی همترازسازی اشتباه داد ؟

This paper analyses the relationship between monetary policy and asset prices using a structural rational expectations open economy model that allows for the effect of asset prices and exchange rates on aggregate demand. We assume that asset prices and exchange rates follow a partial adjustment mechanism whereas they are positively affected by past changes, thus allowing for ‘momentum trading’, while at the same time we allow for reversion towards fundamentals. We then conduct stochastic simulations using two alternative monetary policy rules, inflation-forecast targeting and the standard Taylor rule. The results indicate that, under both rules, interest rate setting that takes into account asset price misalignments leads to lower overall macroeconomic volatility, as measured by the postulated loss function of the central bank.

The exuberant bull stock market associated with the ‘new economy’ and the ‘dot com’ boom of the 1990s came into an abrupt halt in early 2000. Since then, stock price indices have fallen and are far bellow the levels they reached in the late 1990s. Apart from the ‘internet bubble’, the previous century witnessed two other major episodes of sudden asset price reversals after long periods of sustained rises: the 1929 US stock market crash and the Japanese experience of the late 1980s and early 1990s. Both episodes exhibited a regular characteristic of asset price boom–bust cycles, that is, the decline in asset prices was followed by a slowdown in economic activity as well as increased financial and banking sectors instability. Recent work by Detken and Smets (2003) on a large sample of industrial countries indicates that the boom phase typically features rising money, output and credit gaps, and low interest rates relative to a Taylor rule benchmark. It has been argued that the widespread financial deregulation of asset markets that began in the 1980s may have contributed to an increase in the frequency of such episodes (IMF, 2003). As Bordo and Jeanne (2002) point out, during the boom period the domestic private sector accumulates high levels of debt on the expectation of further rises in asset prices, while the assets themselves serve as a collateral. When asset prices fall, the decline in the value of the collateral induces consumers to cut back expenditure and firms to reduce investment spending. In essence, the deterioration of balance sheets, following large asset price reductions, further exacerbates the negative ‘wealth effect’ on spending, leading to additional negative effects on asset prices, bank lending, and economic output (collateral-induced credit crunch). In a number of articles, Charles Goodhart and Boris Hofmann establish empirically the link between output growth, credit aggregates, and asset price movements in a number of major economies.1 A recent study by the IMF (2003) analyses the after-effects of sharp asset price reversals and finds that equity prices reductions are quite frequent and are associated with heavy GDP losses. In addition, Borio and Lowe (2002) stress that swings in asset prices have historically accompanied episodes of financial instability. In particular, there is concern that asset price boom and busts could create systemic financial risk.2 An important issue related to the above concerns is the establishment of the appropriate monetary policy response to asset price fluctuations. Should the central bank care about financial instability? Nowadays, everyone recognizes price level stability as the primary objective of monetary policy. Indeed, as Issing (2003) emphasizes, price stability and financial stability tend to mutually reinforce each other in the long run. However, as the examples of the US in the 1920s and 1990s and Japan in the late 1980s demonstrate, financial imbalances may build up even in an environment of stable prices (Borio and Lowe, 2002). Exponents of the ‘new environment’ hypothesis argue that low and stable rates of inflation may even foster asset price bubbles, due e.g. to excessively optimistic expectations about future economic development. Thus, price stability is not a sufficient condition for financial stability. If, in fact, financial stability is defined narrowly, as the degree of interest rate smoothness in the economy, and not widely, as the prevalence of a financial system that continuously ensures the efficient allocation of savings to investment opportunities, then a trade-off between monetary (or price) stability and financial stability may arise.3 The monetary policy response to asset price developments can take two forms, either proactive, or reactive. A reactive approach is consistent with an inflation targeting policy regime focusing on price stability and according to it, the monetary authorities should wait and see whether the asset price reversal occurs, and if it does, to react accordingly to the extent that there are implications for inflation and output stability. Hence, the reactive approach is consistent with an accommodative ex post response to asset price changes. Bernanke and Gertler, 1999 and Bernanke and Gertler, 2001 simulate alternative variants of the Taylor rule in the context of the new keynesian model with sticky wages and a financial accelerator and find that a central bank dedicated to price stability should pay no attention to asset prices per se, except insofar as they signal changes to expected inflation. They also argue that trying to stabilize asset prices is problematic since it is nearly impossible to know for sure whether a given change in asset values results from fundamental factors, non-fundamental factors, or both. Gilchrist and Leahy (2002) employ three alternative dynamic general equilibrium models and, in agreement with Bernanke and Gertler, reach the conclusion that asset prices should not be included in the monetary policy rule. In one set of their simulations, Batini and Nelson (2000) consider exchange rate bubbles that temporarily shift the exchange rate away from the value implied by the uncovered interest parity (UIP) and find that reacting to the exchange rate does not necessarily reduce exchange rate variability, and leads to poorer welfare outcomes. Against this, Cecchetti et al. (2000), claim that “a central bank concerned with both hitting an inflation target at a given time horizon, and achieving as smooth a path as possible for inflation, is likely to achieve superior performance by adjusting its policy instruments not only to inflation (or to its inflation forecast) and the output gap, but to asset prices as well” (p. 2). Ceccheti et al. argue that such a proactive response will reduce the likelihood of asset price bubbles forming, thus reducing the risk of boom–bust investment cycles. Batini and Nelson (2000) provide some simulation evidence in favour of a proactive stance with respect to exchange rate bubbles when they replace the UIP condition with a more backward-looking type of exchange rate adjustment. In this paper, we take another look at the interaction between monetary policy and asset prices using a small rational expectations model that takes into account the effect of asset prices on aggregate demand in order to capture investment and consumption wealth effects. Unlike Bernanke and Gertler, 1999 and Bernanke and Gertler, 2001 and Cecchetti et al. (2000), we employ an open economy model which is more appropriate to analyse the United Kingdom's experience. We extend Batini and Nelson's (2000) work by considering the appropriate monetary policy reaction to bubbles in assets other than the exchange rate, such as stock prices and house prices. Using stochastic simulations, we then examine how inflation, output, interest rates, and asset prices behave under alternative policy rules. Our results confirm previous findings by Cecchetti et al. (2000) in that, macroeconomic volatility can be reduced with a mild reaction of interest rates to asset price misalignments from fundamentals, even when we account for an open-economy setting. Our main contribution lies in the fact that in our simulations we employ two alternative monetary policy rules, inflation forecast targeting, and the standard Taylor rule, with the main conclusions for the role of monetary policy with respect to asset prices remaining unchanged. We also incorporate an alternative partial adjustment mechanism of asset prices towards their fundamental value that allows for both ‘momentum trading’ and ‘fundamentals pull’. The remainder of the paper is structured as follows. The next section describes the theoretical model that will be employed in the simulations. In Section 3, we calibrate the model's structural parameters on the basis of previous econometric evidence for the United Kingdom (UK) economy. Section 3.1 presents the results from impulse response analysis, and Section 3.2 compares the effect on macroeconomic uncertainty from alternative monetary policy choices. Section 4 provides conclusions.

This paper examines the relationship between monetary policy and asset prices using a structural model of an open economy that allows for the effect of asset prices and exchange rates on aggregate demand. The sharp reduction in stock prices on early 2000 and the continuing worldwide increases in house prices have resulted in growing interest among academics and policymakers to study the links between monetary policy, asset market developments and the real economy. Financial imbalances and the economic instability associated with pronounced asset price misalignments pose important challenges for monetary policymakers. Concentrating on price stability alone, as a growing number of inflation targeting countries do, is no guarantee that financial instability and the serious after-effects of bubbles bursting can be avoided. Taking these arguments into consideration, we start from a small-scale rational expectations macro model where, in line with recent empirical findings and theoretical intuition, the current level of output is positively related to lagged real asset prices. In this study, we contribute to the existing literature by employing an alternative model for the dynamic evolution of asset prices and exchange rates. We assume that asset prices and exchange rates follow a partial adjustment mechanism in the context of which, they are positively affected by past changes due to momentum trading, while at the same time we also allow for reversion towards their fundamental value. Analyzing whether the central bank should take into account asset price misalignments when setting interest rates, we consider both the inflation-forecast targeting rule and the standard Taylor rule. The main result of our simulations is that a mild response to asset price deviations from fundamentals promotes overall macroeconomic stability. This result is robust to all four postulated loss functions and policy rules. Monetary policy should not only react strongly to inflation (or its forecast) but should also take into account output developments and asset price misalignments. We acknowledge that it may be difficult to interpret asset price movements and distinguish between fundamental and non-fundamental components, but the same type of uncertainty exists when policy makers are faced with stochastic trend output. Hence, there is scope for the monetary authorities in an open economy to take into account asset price misalignments in the conduct of monetary policy despite the measurement errors that they might face.