Monetary policy and asset prices: the investment channel

Abstract

The role of monetary policy during periods of asset price volatility has been the subject of discussion among economists and policymakers at least since the 1920s and the Great Depression that followed. In this paper we survey the recent and rapidly growing literature on this topic, with an emphasis on the investment channel. We present a detailed discussion of the hypotheses that have been used to justify, or criticise, a response to asset prices. These hypotheses concern imperfections in financial markets, bubbles in asset prices, and the information on which firm managers and central banks base their decisions.Investment; Asset Prices; Inflation Targeting; Fundamentals.