Determinacy, stock market dynamics and monetary policy inertia

We study equilibrium determinacy in a New-Keynesian model where the Central Bank responds to asset prices growth. Unlike Taylor-type rules that react to asset prices, the proposed alternative does not harm dynamic stability and in certain cases promotes determinacy by inducing interest-rate inertia. ► We look at an NK model where the Central Bank reacts to asset prices growth. ► Reacting to asset prices growth translates into monetary policy gradualism. ► Inertia alleviates problems of REE indeterminacy observed for some Taylor rules. ► Responding to asset prices does not necessarily harm dynamic stability. ► In some cases it promotes equilibrium determinacy.