Batini, Nicoletta, and Edward Nelson, 2000, “When the Bubble Bursts: Monetary Policy Rules and Foreign Exchange Market Behavior” (unpublished; London: Bank of England).
Baxter, Marianne, and Robert G. King, 1999, “Measuring Business Cycles: Approximate Band-Pass Filters for Economic Time Series,” Review of Economics and Statistics, Vol. 81 (November), pp. 575–93.
Bernanke, Ben S., and Mark Gertler, 1999, “Monetary Policy and Asset Price Volatility,” Federal Reserve Bank of Kansas City, Economic Review, No. 4, pp. 17–51.
Bernanke, Ben S., and Mark Gertler, 2001, “Should Central Banks Respond to Movements in Asset Prices?” American Economic Review, Vol. 91 (May), pp. 253–57.
Bernanke, Ben S., and Ilian Mihov, 1998, “Measuring Monetary Policy,” Quarterly Journal of Economics, Vol. 113 (August), pp. 869–902.
Bernanke, Ben S., and Michael Woodford, 1997, “Inflation Forecasts and Monetary Policy,” Journal of Money, Credit, and Banking, Vol. 29 (November), pp. 653–86.
Bordo, Michael D., and Olivier Jeanne, 2002, “Monetary Policy and Asset Prices: Does ‘Benign Neglect’ Make Sense?” International Finance, Vol. 5, No. 12, pp. 139–64.
Borio, C. E. V., N. Kennedy, and Steven D. Prowse, 1994, “Exploring Aggregate Asset Price Fluctuations Across Countries: Measurement, Determinants and Monetary Policy Implications,” BIS Economic Paper No. 40 (Basle: Bank for International Settlements).
Carare, Alina, and Mark R. Stone, 2003, “Inflation Targeting Regimes,” IMF Working Paper 03/9 (Washington: International Monetary Fund).
Cecchetti, Stephen G., Hans Genberg, John Lipsky, and Sushil B. Wadhwani, 2000, Asset Prices and Central Bank Policy, Geneva Reports on the World Economy No. 2 (Geneva: International Center for Monetary and Banking Studies).
Clarida, Richard H., 2001, “The Empirics of Monetary Policy Rules in Open Economies,” International Journal of Finance and Economics, Vol. 6 (October), pp. 315–23.
Clarida, Richard H., Jordi Galí, Mark and Gertler, 1998, “Monetary Policy Rules in Practice: Some International Evidence,” European Economic Review, Vol. 42 (June), pp. 1033–67.
Clarida, Richard H., Jordi Galí, Mark and Gertler, 1999, “The Science of Monetary Policy: A New Keynesian Perspective,” Journal of Economic Literature, Vol. 37 (December), pp. 1661–1707.
Clarida, Richard H., Jordi Galí, Mark and Gertler, 2000, “Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory,” Quarterly Journal of Economics, Vol. 115 (February), pp. 147–180.
Cochrane, John H., 1994, “Permanent and Transitory Components of GNP and Stock Prices,” Quarterly Journal of Economics, Vol. 109, No. 1, pp. 241–65.
Eijffinger, Sylvester C. W., and Harry Huizinga, 1999, “Should Monetary Policy Be Adjusted Frequently?” CEPR Discussion Paper No. 2074 (London: Centre for Economic Policy Research).
Flood, Robert, and Peter Isard, 1989, “Monetary Policy Strategies,” Staff Papers, International Monetary Fund, Vol. 36 (September), pp. 612–32.
Galí, Jordi, and Mark Gertler, 1999, “Inflation Dynamics: A Structural Econometric Analysis,” Journal of Monetary Economics, Vol. 44, No. 2, pp. 195–222.
Galí, Jordi, and Mark Gertler, and J. David López-Salido, 2001, “European Inflation Dynamics,” European Economic Review, Vol. 45, No. 7, pp. 1237–70.
Gertler, Mark, Marvin Goodfriend, Otmar Issing, and Luigi Spaventa, 1998, “Asset Prices and Monetary Policy: Four Views,” report presented at the CEPR/Bank for International Settlements conference (London: Centre for Economic Policy Research).
Gilchrist, Simon, and John V. Leahy, 2002, “Monetary Policy and Asset Prices,” Journal of Monetary Economics, Vol. 49 (January), No. 1, pp. 75–97.
Goodfriend, Marvin, 1987, “Interest Rate Smoothing and Price Level Trend-Stationarity,” Journal of Monetary Economics, Vol. 19 (May), pp. 335–48.
Goodhart, C., 2001, “What Weight Should Be Given to Asset Prices in the Measurement of Inflation?” Economic Journal, Vol. 111 (June), pp. F335–56.
Greenspan, Alan, 1999, “Monetary Policy and the Economic Outlook,” testimony before the Joint Economic Committee, U.S. Congress, Washington, June.
Hansen, Bruce E., 1992, “Testing for Parameter Instability in Linear Models,” Journal of Policy Modeling, Vol. 14 (August), pp. 517–33.
Hansen, Lars Peter, 1982, “Large Sample Properties of Generalized Method of Moments Estimators,” Econometrica, Vol. 50 (July), pp. 1029–54.
Hodrick, Robert J., and Edward C. Prescott, 1997, “Postwar U.S. Business Cycles: An Empirical Investigation,” Journal of Money, Credit, and Banking, Vol. 29 (February), pp. 1–16.
Hunt, Ben, and Alessandro Rebucci, 2003, “The U.S. Dollar and the Trade Deficit: What Accounts for the Late 1990s?” IMF Working Paper 03/194 (Washington: International Monetary Fund).
International Monetary Fund, 2000, World Economic Outlook, May 2000: A Survey by the Staff of the International Monetary Fund (Washington).
Jinushi, Toshiki, Yoshihiro Kuroki, and Ryuzo Miyao, 2000, “Monetary Policy in Japan Since the Late 1980s: Delayed Policy Actions and Some Explanations,” in Japan’s Financial Crisis and Its Parallels to U.S. Experience, ed. by Ryoichi Mikitani and Adam Posen, Institute for International Economics, Special Report, Vol. 13, pp. 115–48.
- Search Google Scholar
- Export Citation
)| false Jinushi, Toshiki, Yoshihiro Kuroki, and Ryuzo Miyao, 2000, “Monetary Policy in Japan Since the Late 1980s: Delayed Policy Actions and Some Explanations,”in Japan’s Financial Crisis and Its Parallels to U.S. Experience, ed.by Institute for International Economics, Ryoichi Mikitaniand Adam Posen, Special Report, Vol. 13, pp. 115– 48.
Kozicki, Sharon, 1999, “How Useful Are Taylor Rules for Monetary Policy?” Federal Reserve Bank of Kansas City, Economic Review, Vol. 84, No. 2, pp. 5–33.
McKinnon, Ronald, and Gunther Schnabl, 2003, “Synchronized Business Cycles in East Asia: Fluctuations in the Yen/Dollar Exchange Rate and China’s Stabilizing Role,” World Economy, Vol. 26 (August), pp. 1067–88.
Obstfeld, Maurice, and Kenneth Rogoff, 1995, “The Mirage of Fixed Exchange Rates,” Journal of Economic Perspectives, Vol. 9 (Fall), pp. 73–96.
Oliner, Stephen D., Glenn D. Rudebusch, and Daniel Sichel, 1996, “The Lucas Critique Revisited. Assessing the Stability of Empirical Euler Equations for Investment,” Journal of Econometrics, Vol. 70 (January), pp. 291–316.
Rigobon, Roberto, and Brian Sack, 2003, “Measuring the Reaction of Monetary Policy to the Stock Market,” Quarterly Journal of Economics, Vol. 118 (May), pp. 639–69.
Rotemberg, Julio J., and Michael Woodford, 1999, “The Cyclical Behavior of Prices and Costs,” in Handbook of Macroeconomics, ed. by John B. Taylor and Michael Woodford, Vol. 1B (Amsterdam: North-Holland), pp. 1051–1135.
Rudebusch Glenn D., 1998, “Do Measures of Monetary Policy in a VAR Make Sense?” International Economic Review, Vol. 39 (November), pp. 907–31.
Rudebusch Glenn D., 2001, “Is the Fed Too Timid? Monetary Policy in an Uncertain World,” Review of Economics and Statistics, Vol. 83 (May), pp. 203–17.
Sarno, Lucio, and Mark P. Taylor, 2001, “Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?” Journal of Economic Literature, Vol. 39 (September), pp. 839–68.
Sarno, Lucio, and Mark P. Taylor, 2002, “Purchasing Power Parity and the Real Exchange Rate,” IMF Staff Papers, Vol. 49, No. 1, pp. 65–105.
Sbordone, Argia, 2002, “Prices and Unit Labor Costs: A New Test of Price Stickiness,” Journal of Monetary Economics, Vol. 49 (March), pp. 265–92.
Svensson, Lars E. O., 1997, “Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets,” European Economic Review, Vol. 41 (June), pp. 1111–46.
Taylor, John B., 1993, “Discretion Versus Policy Rules in Practice,” Carnegie-Rochester Conference Series on Public Policy, Vol. 39 (December), pp. 195–214.
Taylor, John B., 1999, Monetary Policy Rules, National Bureau of Economic Research Conference Report series (Chicago and London: University of Chicago Press).
Taylor, John B., 2001, “The Role of the Exchange Rate in Monetary-Policy Rules,” American Economic Review, Vol. 91 (May), pp. 263–67.
For an extensive discussion of the issues related to the role of asset prices in designing macroeconomic policy, see the International Monetary Fund’s World Economic Outlook (May 2000, Chapter 3, “Asset Prices and the Business Cycle”).
This rule can also be obtained in a framework where the central bank faces a quadratic loss function over inflation and output (Svensson, 1997; Bernanke and Woodford, 1997, and the references therein).
The ex ante real interest rate can be obtained as
We decided to use this sample period because, as documented in previous contributions, there is evidence of structural instability in monetary policy reaction functions when using pre-1979 data (Clarida, Galí, and Gertler, 1998).
For further details, see the relevant discussion in Galí, Gertler, and López-Salido (2001), which we followed closely in the construction of our time series.
A robustness exercise was carried out using measures based on the S&P 500 index for the United States, the FTSE100 index for the United Kingdom, and the NIKKEI 225 index for Japan (see “Robustness” in Section III).
As discussed in our “Robustness” section below, these findings hold up when using different measures of asset prices disequilibria.
We also executed the same robustness exercise using the S&P 500, FTSE100, and NIKKEI 225 indices for the United States, the United Kingdom, and Japan, respectively, over a shorter sample period (because of data availability). In addition, we checked whether having asset prices and exchange rates enter the augmented policy rule contemporaneously made a difference. The results, not reported, are qualitatively and quantitatively similar to the ones reported in Tables 2 and 3.
Our interpretation that the reaction of central banks to asset price and exchange rate disequilibria may depend on the size of the disequilibria themselves suggests that a nonlinear characterization of interest rate rules may be a logical extension of our research. The possibility of a nonlinear reaction function can also be rationalized on the theoretical work of Bordo and Jeanne (2002) and is indeed suggested by the earlier work on escape clauses of Flood and Isard (1989). However, a nonlinear generalization is not straightforward in this context since the reaction function would be partly linear—in expected inflation and output gap—and partly nonlinear—in asset prices and exchange rates. To the best of the authors’ knowledge, no GMM or instrumental variables estimator exists to date for models of this kind (or indeed for any multivariate threshold model), which makes estimation and statistical inference especially cumbersome in this context.