Monetary Policy, Asset Prices and Adaptive Learning

Vicente Machado

No 274, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: Following recent episodes of financial distress, the interaction between monetary policy and asset price fluctuations has gained renewed attention. Here, we assess the role of asset price misalignments in monetary policy in an adaptive learning context. Our model first extends Bullard and Mitra (2002), including an additional role for asset prices. From the point of view of the E-Stability criterion, commonly used in the learning literature, we find that a response to stock prices is not desirable under both a forward expectations policy rule and an interest rate rule responding to contemporaneous values. Heterogeneous beliefs about the dynamics of asset price fluctuations, inflation and the output gap are introduced and we also evaluate an optimal monetary policy rule including a weight on asset prices. Overall we find that the Taylor principle remains important over all interest rate rules analysed and that central banks should act cautiously when considering the introduction of stock prices in monetary policy.

Date: 2012-04
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://www.bcb.gov.br/content/publicacoes/WorkingPaperSeries/wps274.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bcb:wpaper:274

Access Statistics for this paper

More papers in Working Papers Series from Central Bank of Brazil, Research Department
Bibliographic data for series maintained by Rodrigo Barbone Gonzalez ().