Monetary Policy, Doubts and Asset Prices

Pierpaolo Benigno and Luigi Paciello ()

No 16386, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Asset prices and the equity premium might reflect doubts and pessimism. Introducing these features in an otherwise standard New-Keynesian model changes in a quite substantial way the nature of the policy that maximizes the welfare of the consumers in the model. First, following productivity shocks, optimal policy in this model is more accommodating than in a standard New-Keynesian model, and may even inflate the equity premium. Second, asset-price movements improve the inflation-output trade-off so that average output can rise without increasing much average inflation. Finally, a strict inflation-targeting policy may result in lower average welfare than a more flexible inflation-targeting policy, which instead increases the comovements between inflation, asset prices and output growth.

JEL-codes: E31 E32 E44 (search for similar items in EconPapers)
Date: 2010-09
Note: EFG ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Published as Benigno, Pierpaolo & Paciello, Luigi, 2014. "Monetary policy, doubts and asset prices," Journal of Monetary Economics, Elsevier, vol. 64(C), pages 85-98.

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Related works:
Journal Article: Monetary policy, doubts and asset prices (2014)
Working Paper: Monetary Policy, Doubts and Asset Prices (2011)
Working Paper: Monetary Policy, Doubts and Asset Prices (2010)
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