Reaction of Central Banks to Financial Asset Prices and to the Exchange Rate

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2003

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Revue économique

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Cairn.info

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Daniel Laskar, « Reaction of Central Banks to Financial Asset Prices and to the Exchange Rate », Revue économique, ID : 10670/1.040480...

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In an open economy model in which the price of financial assets (equities) is introduced, we consider the issue of whether, and how, the Central Bank should react to the exchange rate and to the price of equities. A fixed exchange rate regime is then considered and its potentially harmful effect in case of financial shocks is underlined. The case where the Central Bank does not know the shocks, and the issue of instrument choice in case of instrument smoothing, are also examined. The analysis is finally extended to a two-country model and the effect of cooperation between Central Banks for the issue at hand is studied.Classification JEL: E 44, E52, F42.

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