Monetary Policy, Stock Prices and Temporal Aggregation in a New Keynesian Model with Behavioural Expectations

Christian R. Proano and Naira Kotb

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: In this paper, we investigate the implications of temporal aggregation, i.e. the discrepancy between the Data Generation Process (DGP) and the Data Collection Process (DCP), for the design of monetary policy in a New Keynesian macroeconomic framework with boundedly rational agents. We extend the model by Airaudo, Nistico and Zanna (2015) who investigate if monetary policy should explicitly respond to stock prices due to the presence of a structural linkage between the stock market and the real activity. We stress this rationale in a similar model with agents with heterogeneous boundedly rational expectations by showing that responding to the stock price is further justified when real data is only available at a delay due to temporal aggregation. Under these conditions, reacting moderately to high frequency stock price movements can stabilise both the financial and the real sectors.

Keywords: new Keynesian model; mixed-frequency macroeconomics; behavioural macroeconomics (search for similar items in EconPapers)
Pages: 35 pages
Date: 2025-12
New Economics Papers: this item is included in nep-cba and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2025-68

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