719 - Wealth Effects and Monetary Policy

Wetenschappelijke publicatie
Date 1 December 2002

This paper explores the importance of wealth effects for monetary policy in the context of the policy strategy of the European Central Bank (ECB). Causality tests indicate that nominal equity prices have predictive power for ECB policy indicators of real activity, while housing prices have predictive power for price indicators, and money and credit aggregates. This means that, at least indirectly, monetary policy takes asset price developments into account. The results, however, point to strong differences among individual euro area countries. On the question of whether or not a central bank should explicitly target asset prices directly or through the inclusion of asset prices in its measure of inflation, counterfactual model simulations suggest that this would not have led to a significantly different macroeconomic performance in the euro area. Key words: Wealth effects, asset prices, monetary policy JEL codes: E3, E44, E5