Asset prices and monetary policy

Abstract

This thesis investigates the effects of monetary policy on asset prices. In Chapters 2 and 3 a model is developed and evaluated, which can be used to examine the effects of a policymaker reacting to an asset price bubble. The model supports the idea that a policymaker reacting to asset prices, going beyond what would be required by policy consistent with the Taylor Rule, can achieve better economic outcomes than the policymaker who does not react to asset prices. These outcomes are in terms of the level and volatility of the bubble, output and inflation. In Chapter 4 propensity score matching is implemented to estimate the effects of inflation targeting on the growth and volatility of both house prices and stock prices. This thesis finds that there is a significant effect of IT on house price growth but not volatility and a significant effect of IT on stock price volatility and in some cases stock price growth.