Monetary policy and asset prices

Abstract

How should¾and how do¾asset prices affect monetary policy? This rather basic question can have strikingly different answers. In some regimes, both ancient and modern, monetary policy is entirely about asset prices. Under the gold standard, and in fixed exchange rate regimes, monetary policy is wholly geared to the domestic currency price of a single asset¾gold or an international currency such as the dollar. An asset price is then the very anchor of the domestic price level. By contrast, asset prices do not figure at all in simple monetarist rules for the growth rates of monetary quantities. And where the aim¾or at least an aim¾of monetary policy is directly to control the rate of inflation of goods and services prices, it is not immediately obvious what role, if any, asset prices should play in the setting of policy.