Perli and Sack (2003) discuss the volatility in Treasury bond markets associated with mortgage hedging activity. 7  Stock and Watson (2003b) provide an exhaustive survey of the literature on the predictive power of asset prices for output and inflation. Parts of my discussion in this section draw from their paper.
A strategy that is forward-looking and has a medium term horizon for the achievement of its objective should be able to deal with this problem of supply shocks. A final point about the objective function regards the consideration of other possible objectives of policy in the field of financial stability.