Monetary Policy and Asset Price Volatility

NBER WORKING PAPER SERIES

MONETARY POLICY AND ASSET PRICE VOLATILITY

Ben Bernanke Mark Gertler

Working Paper 7559 http://www.nber.org/papers/w7559 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 February 2000

Presented at the Federal Reserve Bank of Kansas City conference on “New Challenges for Monetary Policy”, Jackson Hole, Wyoming, August 26-28, 1999. The authors acknowledge research support from the National Science Foundation. Refet Gurkaynak, Matthew Moore, Pau Rabenal, and Federico Ravenna provided excellent research assistance. We thank Rudiger Dornbusch for useful comments. The views expressed

herein are those of the authors and are not necessarily those of the National Bureau of Economic Research.

© 2000 by Ben Bernanke and Mark Gertler. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.

Monetary Policy and Asset Price Volatility Ben Bernanke and Mark Gertler NBER Working Paper No. 7559 February 2000 JEL No. E5, E44 ABSTRACT We explore the implications of asset price volatility for the management of monetary policy. We show that it is desirable for central banks to focus on underlying inflationary pressures. Asset prices become relevant only to the extent they may signal potential inflationary or deflationary forces. Rules that directly target asset prices appear to have undesirable side effects. We base our conclusions on (i) simulation of different policy rules in a small scale macro model and (ii) a comparative analysis of recent U.S. and Japanese monetary policy.

Ben Bernanke Woodrow Wilson School of Public and International Affairs Princeton University Princeton, NJ 08544 and NBER bernanke@princeton.edu

Mark Gertler Department of Economics New York University 269 Mercer Street, 7th Floor New York, NY 10003 and NBER gertlerm@fasecon.econ.nyu.edu...