Monetary Policy and Asset Prices

Abstract

How should asset prices affect monetary policy, and how do they? It is argued that asset prices should not be included in the measure of inflation targeted by monetary policy, which should focus on the prices of goods and services for current consumption. The information yielded directly by asset prices, e.g. about inflation expectations and interest rate expectations, is examined. Finally, the question of what asset prices add to other indicators is considered, and it is concluded that asset prices matter for monetary policy because they help to inform judgements about inflation prospects.