Theoretical Economics Letters

Volume 3, Issue 3 (June 2013)

ISSN Print: 2162-2078   ISSN Online: 2162-2086

Google-based Impact Factor: 0.82  Citations  

Asset Prices, Nominal Rigidities, and Monetary Policy: Role of Price Indexation

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DOI: 10.4236/tel.2013.33030    2,731 Downloads   4,070 Views  
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ABSTRACT

A recent paper by Carlstrom and Fuerst [“Asset Prices, Nominal Rigidities, and Monetary Policy,” Review of Economic Dynamics, Vol. 10, 2007, pp. 256-275] finds that monetary policy response to share prices is a source of equilibrium indeterminacy because an increase in inflation implies a high real marginal cost and low share prices in a sticky-price economy. We find that if the New Keynesian Phillips curve has a lagged inflation term caused by price indexation, this effect is weakened. Moreover, equilibrium indeterminacy caused by the monetary policy response to share prices never arises if all the firms that cannot re-optimize their prices follow price indexation.

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K. Nutahara, "Asset Prices, Nominal Rigidities, and Monetary Policy: Role of Price Indexation," Theoretical Economics Letters, Vol. 3 No. 3, 2013, pp. 182-187. doi: 10.4236/tel.2013.33030.

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