Investigating the Impact of Response to Asset Prices in the Monetary Policy on Macroeconomic Stability Based on Quantile Regression (Cross-Country Study)

The purpose of this research is to investigate the effect of including asset prices in Taylor's rule on the macroeconomic stability and providing additional information for monetary policymakers. To do this, at the first stage, in addition to inflation and output deviations from their targets, stock price indices and house prices are included in Taylor's rule Quantile regressions for 27 countries over the time period 1980-2017. At the second stage, the coefficients of stock price indices and house prices that are estimated in the first stage for each country are included in cross-section regressions for standard deviations of economic growth and inflation as indicators macroeconomic stability. Our empirical results show the response of central banks to asset prices, especially stock prices, in determining policy interest rates. The extent of this response is more for lower quantiles. The second stage estimates show the significant effects of including stock prices and house prices in monetary policy in reducing inflation instability and economic growth instability, respectively.