Monetary Policy and Asset Prices ‘an introduction to the literature’

Abstract

How should monetary policy respond to asset price fluctuations? The vast literature concerning this area of economics does not provide unambiguous recommendations. This thesis serves as a review of the prominent models that analyze the interdependent relationship between monetary policy and asset prices. To increase the readability for novice readers, explanations of contextual key concepts and modelling frameworks are given. The available response strategies recommended by researchers, summarize the different views present in the literature. The thesis offers also a discussion on how monetary authorities in a small, open economy should conduct policy when there are fluctuations in domestic stock prices, domestic real estate prices, and the exchange rate.