Asymmetric Monetary Policy Towards the Stock Market: A DSGE Approach

Working paper no 77, 2012

Authors Ravn, Søren Hove
Subject International Economy; Danish Economy; Monetary- and foreign-exchange policy; Monetary conditions; USA; Monetary policy; The money and currency markets; Monetary-policy transmission
Type Working paper
Year 2012
Published 18 January 2012
In the aftermath of the financial crisis, it has been argued that a guideline for future policy should be to take the 'a' out of 'asymmetry' in the way monetary policy deals with asset price movements. Recent empirical evidence has suggested that the Federal Reserve may have followed an asymmetric policy towards the stock market in the pre-crisis period. The present paper studies the effects of such a policy in a DSGE model. The asymmetric policy rule introduces an important non-linearity into the model: Booms in output and inflation will tend to be amplified, while recessions will be dampened. I further investigate to what extent an asymmetric stock price reaction could be motivated by the desire of policymakers to correct for inherent asymmetries in the way stock price movements affect the macroeconomy.