Monetary rule and prices of financial assets: Review of the empirical literature

Abstract

The objective of this article is to surround the empirical literature and to analyze the various theoretical works which have been interested in the attitude of central banks in the face of excessive deviations of the prices of financial assets from their equilibrium value. The importance of this theme stems from the importance of financial market stability in macroprudential and economic stability, on the one hand, and on the other hand, any action by the monetary authorities in the face of movements in the prices of financial assets requires theoretical and conceptual prerequisites which mainly relate to the determination of the equilibrium value of asset prices and the identification of the nature of the shocks behind these movements.

The crossing of writings on this theme allows us to conclude that the effectiveness of central bank interventions is mainly based on the concepts of credibility and transparency and that the costs of non-intervention weigh much more than the costs of adjustment before crises. Also, the variables implemented to switch from the intervention regime to the observation regime remain ambiguous. In summary, empirical studies on the effectiveness of asset price targeting are mixed. It is difficult to measure the direct impact of monetary policy on asset prices, and results vary depending on the economic context

Keywords: financial asset prices, monetary rule,

JEL classification: G0, G1

Paper Type : Theoretical Research