Incorporating asset prices in policy rule leads to stable economy.
The research looked at whether including financial factors in monetary policy can help stabilize the economy. They used a model to see how different policy rules affected inflation and output volatility. The study found that including asset prices in the policy rule can lower volatility in response to domestic shocks. However, this approach is less effective when dealing with shocks from other countries. The best results came from a policy rule that considers changes in output when all types of shocks are present.