Monetary policy, doubts and asset prices

Pierpaolo Benigno and Luigi Paciello ()

Journal of Monetary Economics, 2014, vol. 64, issue C, 85-98

Abstract: Asset prices and the equity premium might reflect doubts and pessimism. Introducing these features in an otherwise standard New-Keynesian model changes optimal policy in a substantial way. There are three main results: (i) asset-price movements improve the inflation-output trade-off so that average output can rise without much inflation costs; (ii) a “paternalistic” policymaker – maximizing the expected utility of the consumers under the true probability distribution – chooses a more accommodating policy towards productivity shocks and inflates the equity premium; (iii) a “benevolent” policymaker – maximizing the objective through which decisionmakers act in their ambiguous world – follows a policy of price stability.

Keywords: Optimal monetary policy; Near rationality; Distorted beliefs; Asset prices; Equity premium (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (44)

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Related works:
Working Paper: Monetary Policy, Doubts and Asset Prices (2011)
Working Paper: Monetary Policy, Doubts and Asset Prices (2010)
Working Paper: Monetary Policy, Doubts and Asset Prices (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:64:y:2014:i:c:p:85-98

DOI: 10.1016/j.jmoneco.2014.02.004

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