EconPapers    
Economics at your fingertips  
 

Asset Prices and Assymetries in the Fed's Interest Rate Rule: a Financial Approach

Katarzyna Romaniuk () and Radu Vranceanu
Additional contact information
Katarzyna Romaniuk: University of Paris 1 Panthéon-Sorbonne, PRISM, Postal: 1, rue Victor Cousin, 75005 PARIS, FRANCE

No DR 08006, ESSEC Working Papers from ESSEC Research Center, ESSEC Business School

Abstract: Financial Newspapers have for long suggested that the Fed tends to provide additional Liquidity when the Stock Market thumbs. We provide a theoretical Explanation for this Behaviour that builds on the Methodology developed by Romaniuk (2008) for a central Banker with two main Goals, Output and Price stability. In this Paper, the Policymaker behaves as a Portfolio Manager who aims at stabilizing Output, Goods Prices, as well as Asset Prices. An optimal, Time-varying Interest Rate Rule is obtained as the Merton's (1971) continuous Time Solution to the Portfolio Manager's Problem. In a second Step, we infer the optimal Interest Rate Rule of a central Bank that can react differently to positive and negative Variations in the Stock Market.

Keywords: Optimal Interest Rate Rule; Portfolio Choice; Fed; Asset Prices; Options Theory (search for similar items in EconPapers)
JEL-codes: C61 E58 G11 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2008-03
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.essec.fr/faculty/showDeclFileRes.do?declId=7691&key=__workpaper__ (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.essec.fr/faculty/showDeclFileRes.do?declId=7691&key=__workpaper__ [301 Moved Permanently]--> https://www.essec.edu/fr/faculty/showDeclFileRes.do?declId=7691&key=__workpaper__)

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:ebg:essewp:dr-08006

Access Statistics for this paper

More papers in ESSEC Working Papers from ESSEC Research Center, ESSEC Business School ESSEC Research Center, BP 105, 95021 Cergy, France. Contact information at EDIRC.
Bibliographic data for series maintained by Sophie Magnanou ().

 
Page updated 2025-03-24
Handle: RePEc:ebg:essewp:dr-08006