Optimal monetary policy in a new Keynesian model with animal spirits and financial markets

Matthias Lengnick and Hans-Werner Wohltmann

Journal of Economic Dynamics and Control, 2016, vol. 64, issue C, 148-165

Abstract: This article presents a macro-finance-interaction model that integrates a NKM with bounded rationality and an agent-based financial market model. We derive four interactive channels between the two sectors where two channels are strictly microfounded. We analyze the impact of the different channels on economic stability and derive optimal (conventional and unconventional) monetary policy rules. We find that coefficients of optimal Taylor rules do not significantly change if financial market stabilization becomes part of the central bank׳s objective function. Additionally, we show that rule-based, backward-looking monetary policy creates huge instabilities if expectations are boundedly rational. Our model is externally validated by showing that it generates fat tailed output growth rates.

Keywords: Agent-based financial markets; New Keynesian macroeconomics; Microfoundation; Optimal monetary policy; Unconventional monetary policy (search for similar items in EconPapers)
JEL-codes: E03 E5 G02 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (26)

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Working Paper: Optimal monetary policy in a new Keynesian model with animal spirits and financial markets (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:64:y:2016:i:c:p:148-165

DOI: 10.1016/j.jedc.2016.01.003

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