Working Paper（21-004E）Trend inflation, asset prices and monetary policy

The main objective of this paper is to investigate monetary policy response to asset price in a sticky price economy where the trend inflation rate is non-zero. We find that monetary policy response to asset price is helpful for achieving equilib-rium determinacy if the trend inflation is negative (i.e., deflation) and sufficiently low. If this is not the case, monetary policy response to asset price becomes a source of equilibrium indeterminacy. We also find that monetary policy response to asset price can be helpful for equilibrium determinacy even if the trend inflation is positive in the case where the nominal wage is also sticky, and the parameter values are consistent with recent micro evidence.