A recent paper by Carlstrom and Fuerst [“Asset
Prices, Nominal Rigidities, and Monetary Policy,” ReviewofEconomicDynamics, Vol.10, 2007, pp.256-275] finds that
monetary policy response to share prices is a source of equilibrium indeterminacy
because an increase in inflation implies a high real marginal cost and low
share prices in a sticky-price economy. We find that if the New Keynesian
Phillips curve has a lagged inflation term caused by price indexation, this
effect is weakened. Moreover, equilibrium indeterminacy caused by the monetary
policy response to share prices never arises if all the firms that cannot
re-optimize their prices follow price indexation.
Cite this paper
K. Nutahara, "Asset Prices, Nominal Rigidities, and Monetary Policy: Role of Price Indexation," Theoretical Economics Letters, Vol. 3 No. 3, 2013, pp. 182-187. doi: 10.4236/tel.2013.33030.
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