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Asset Prices, Nominal Rigidities, and Monetary Policy: Role of Price Indexation
Department of Economics, Senshu University, Kanagawa, Japan
- 1 Department of Economics, Senshu University, Kanagawa, Japan
Theoretical Economics Letters·Volume 03 (2013)·Pages 182–187·Published 7 June 2013·DOI10.4236/tel.2013.33030
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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] find s 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.
KeywordsAsset PricesMonetary PolicyEquilibrium DeterminacyPrice Indexation
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