The Macroeconomic Effects of Asset Price Shocks in a Globalized Financial Market

This paper studies a model where shocks to asset prices affect the real sector of the economy through a credit channel. As financial markets become internationally integrated, the economy becomes less vulnerable to domestic asset price shocks, but more vulnerable to foreign asset price shocks. To the extent that monetary policy stabilization is feasible and desirable, the globalization of financial markets shifts the focus of monetary policy from domestic asset prices to worldwide asset prices.