Monetary policy, asset prices and the wealth channel

Bachelor Thesis from the year 2010 in the subject Economics - Case Scenarios, grade: 5.75 von 6, University of St. Gallen, language: English, abstract: This thesis examines whether monetary policy in the United Kingdom during the last 15 years should have reacted more strongly to asset price misalignments in financial assets and real estate assets, and if it should have reacted with different magnitude to the two asset classes. A counterfactual analysis using a dynamic structural general equilibrium (DSGE) model is conducted to test several scenarios, as well as to derive the optimal parameter set by exposing the model to shocks derived from historical data. It concludes that a more proactive monetary policy would have been preferable in the past, and that monetary policy should have reacted more to misalignments in real estate prices than in financial asset prices. Reacting to asset prices in general is found to be optimal in the random case.