Implications and Relevance
Edited by Phillip Arestis, Michelle Baddeley and John S.L. McCombie
Chapter 5: Stock market prices and the conduct of monetary policy under the New Consensus Monetary policy
Nigel Allington and John McCombie 1. INTRODUCTION In this chapter we consider the broad question of whether or not central banks should take into account, either explicitly or implicitly, the rate of asset price inﬂation, especially when this is much more rapid than the growth of the CPI (consumer price index), in the determination of the nominal interest rate. We shall largely focus on stock market prices and conﬁne our attention to the advanced countries. (Emerging markets raise additional considerations, such as poor prudential ﬁnancial regulation.) This immediately raises both normative and positive issues. First, should the central bank attempt to inﬂuence asset prices through the use of interest rates and then, if it should, in what circumstances? Second, if the central bank should intervene, how effective is the use of interest rates in achieving this? If the answer to the latter is that it is not very effective, then should other instruments be used and, if so, what instruments? This merges into the wider question as to whether interest rates are effective in controlling inﬂation, per se, through inﬂuencing aggregate demand, as the New Consensus Monetary Policy suggests. The New Consensus Monetary Policy, which suggests that the central bank should target inﬂation with no explicit consideration given to asset prices, is discussed in Chapters 2 and 6 (this volume). Therefore we begin by reviewing the evidence as to whether or not the crash of an asset price bubble has any serious adverse effects...
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