By John Y. Campbell
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Extra resources for Asset Prices and Monetary Policy
Our results imply that the benefits to responding to the asset price gap depend on the information structure of the economy. The benefits of responding to the asset price gap are greatest when the private sector is uninformed about the economy’s true state of growth, but the policymaker is informed. At the other extreme, responding to the asset price gap may be detrimental when the private sector is informed and the policymaker is uninformed. In this case, the policymaker is responding to the “wrong” asset price gap.
Second, much of the previous literature focuses on the benefits of responding to the level of asset prices. In our framework, asset price movements would occur in the absence of frictions in either price-setting or financial markets. Thus, we emphasize the importance of the monetary authority’s response to the asset price gap—the gap between the observed asset prices and the underlying potential level of asset prices. Our finding that responding to the growth rate of asset prices is also beneficial is related to Tetlow (2005), who compares the benefit of responding to the growth rate of asset prices relative to the level of asset prices in a robust control framework.
21 This highlights the importance of thinking about bubbles in housing and equity prices separately. There are two reasons for this. First, equity prices are substantially more volatile than housing prices, so the former is much less likely to be permanent than the latter. Reasonably, households respond more aggressively to changes in wealth that they perceive to be perma21. Careful econometric estimates show an even larger disparity. 07 in Germany where the equity is less than 60 percent of GDP.
Asset Prices and Monetary Policy by John Y. Campbell