Designing Central Banks by Herrmann Heinz;Mayes David;Wood Geoffrey E.;

Author:Herrmann, Heinz;Mayes, David;Wood, Geoffrey E.;
Language: eng
Format: epub
Tags: Economics, Finance, Business & Industry
Publisher: Taylor & Francis Group

4 Asset prices again

Finally, I want to return to the issue of whether the prices of assets should be included in the measure of inflation used to define price stability. There are well-known differences of opinion among leading central bankers on whether monetary policy should respond to changes in asset prices, whether the prices of financial assets or real assets such as housing. Woodford (2003), for example, argues against the inclusion of asset prices in the measure of inflation targeted by central banks:

The near-optimal policy stabilizes an inflation measure that puts more weight on prices in the sector where they are stickier…this provides theoretical justification for a policy that targets core inflation rather than the growth of a broader price index, and offers a theoretical criterion for the construction of such an index. It also explains why it is not appropriate to target an inflation measure that includes ‘asset-price inflation’ along with goods-price increases, as is sometimes proposed: even if asset prices are also prices and can also be affected by monetary policy, they are among the prices that are the most frequently adjusted in response to new market conditions, and so their movements do not indicate the kind of distortions that one seeks to minimize.

(Woodford, 2003, pp. 440–441)

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