Monetary policy rules, asset prices and adaptive learning

Vicente Machado

Journal of Financial Stability, 2013, vol. 9, issue 3, 251-258

Abstract: Following the damaging real effects of asset price fluctuations over the recent financial crisis, the debate on the appropriate role of such prices in a monetary policy context has gained renewed attention. This paper argues that a direct monetary policy response to asset prices is not desirable under common instrumental rate rules. To illustrate this point, we build an adaptive learning model, that extends existing learning models in monetary policy, most notably, Bullard and Mitra (2002). The result remains valid in a context with heterogeneous beliefs and is robust to an optimal monetary policy rule including a weight on asset prices.

Keywords: Interest rate rules; Asset prices; Adaptive learning; Expectational stability (search for similar items in EconPapers)
JEL-codes: E44 E52 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:9:y:2013:i:3:p:251-258

DOI: 10.1016/j.jfs.2013.04.002

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