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Was Bernanke Right? Targeting Asset Prices May not be a Good Idea After All

Tiziana Assenza a,b
Michele Berardi c
Domenico Delli Gatti a
aDepartment of Economics and Finance, CLE, Università Cattolica del Sacro Cuore, Largo Gemelli 1, 20123 Milano, Italy, e-mail:
bAmsterdam School of Economics, CeNDEF, University of Amsterdam, Valckenierstraat 65-67, 1018 XE Amsterdam, The Netherlands, e-mail:
cSchool of Social Sciences, The University of Manchester, Oxford Road, Manchester M13 9PL, UK, e-mail:

Monetary Policy in the Context of the Financial Crisis: New Challenges and Lessons

ISBN: 978-1-78441-780-2, eISBN: 978-1-78441-779-6

Publication date: 1 July 2015

Abstract

Should the central bank target asset price inflation? In their 1999 paper Bernanke and Gertler claimed that price stability and financial stability are “mutually consistent objectives” in a flexible inflation targeting regime which “dictates that central banks … should not respond to changes in asset prices.” This conclusion is straightforward within their framework in which asset price inflation shows up as a factor “augmenting” the IS curve. In this chapter, we pursue a different modeling strategy so that, in the end, asset price dynamics will be incorporated into the NK Phillips curve. We put ourselves, therefore, in the best position to obtain a significant stabilizing role for asset price targeting. It turns out, however, that inflation volatility is higher in the asset price targeting case. After all, therefore, targeting asset prices may not be a good idea.

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Acknowledgements

Acknowledgments

We are grateful for comments and criticisms to A. Marcet, K. Lansing and participants to the CEF workshop, Sydney, July 2009; Guido Ascari, Andrea Colciago and participants to the Macroeconomic Dynamics workshop, Pavia, December 2009; Markus Knell and participants to the seminar at the Oesterreichische National bank, Wien, March 2010; J. Galì and participants to the Zeuthen workshop, Copenhagen, March 2010; participants to the 27th Symposium on Money, Banking and Finance, Bordeaux, June 2010; last but not least we thank M. Motolese and M. Lossani for insightful discussions. The usual disclaimer applies. The research leading to these results has received funding from the European Community’s 7th Framework Programme (FP7/2007–2013) under Socio-economic Sciences and Humanities, grant agreement #225408 (POLHIA).

Citation

Assenza, T., Berardi, M. and Gatti, D.D. (2015), "Was Bernanke Right? Targeting Asset Prices May not be a Good Idea After All", Monetary Policy in the Context of the Financial Crisis: New Challenges and Lessons (International Symposia in Economic Theory and Econometrics, Vol. 24), Emerald Group Publishing Limited, Leeds, pp. 451-496. https://doi.org/10.1108/S1571-038620150000024025

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Emerald Group Publishing Limited

Copyright © 2015 Emerald Group Publishing Limited

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