This thesis shows that since the mid 1980s a sharp fall in equity and house prices tends to go hand in hand with a reduction of the monetary policy interest rate, which is the central bank’s main instrument to safeguard price stability. In exceptional circumstances, the policy rate can reach the nominal bound at zero, where a further reduction to boost the economy is impossible. If the central bank does not target asset prices, it will still react to their effects on economic activity and inflation. When equity and house prices fall, collateral value declines and loans become more risky. This drives up market interest rates, reducing economic growth and inflation. The central bank can neutralise these effects by lowering the policy rate. This thesis demonstrates the relevant mechanisms in a formal model. If the policy rate hits the zero lower bound, there are alternative instruments to stimulate the economy. It is demonstrated that increasing the money supply may increase welfare. In so doing financial market liquidity is increased, lowering market interest rates and stimulating the economy.

inflation, monetary policy, zero lower bound
J. Swank (Job)
Erasmus University Rotterdam , Academic Press Europe
Swank, Prof. Dr. J. (promotor)
978-90-78927-04-4
hdl.handle.net/1765/10639
Erasmus School of Economics

Ullersma, C.A. (2007, November 15). Monetary Policy in a Low Inflation Environment. Academic Press Europe. Retrieved from http://hdl.handle.net/1765/10639