Asset Prices, Nominal Rigidities, and Monetary Policy: Negative Monetary Policy Responses to Asset Price Fluctuations

Abstract

Carlstrom and Fuerst [“Asset Prices, Nominal Rigidities, and Monetary Policy,” Review of Economic Dynamics, Vol. 10, 2007, pp. 256-275] find that a positive monetary policy response to share prices is a source of equilibrium indeterminacy. In this note, we investigate the negative response of a central bank to share prices. We find that a negative monetary policy response to share prices is also a source of equilibrium indeterminacy.