Since the late 1980s, the Japanese economy has experienced tremendous rise and fall of asset prices and large fluctuations of real economic activity, while the general price level has remained relatively stable. Such developments have raised the question of whether monetary policy should target asset prices rather than conventional price indices. This paper focuses on how to make use of information inherent with asset price fluctuations in the monetary policy judgment. To this end, it investigates the possibility of incorporating asset price data into inflation measures by extending the conventional price index concept into a dynamic framework. The main conclusion of this paper is as follows. Although the concept of such extensions of the conventional price index is highly evaluated from a theoretical viewpoint, it is difficult for monetary policy makers to expect it to be more than a supplementary indicator for monetary policy judgment. This is because (1) reliability of asset price statistics is quite low, compared with the conventional price indices; and (2) asset price changes do not necessarily mean that the future price changes, because there are a lot of sources for asset price fluctuation besides the private-sector expectation for inflation.
Keywords: Asset price; Intertemporal cost of living index; Dynamic equilibrium price index; Monetary policy; Information variable
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.