Asset Prices and Assymetries in the Fed's Interest Rate Rule: a Financial Approach
Katarzyna Romaniuk () and
Radu Vranceanu ()
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Katarzyna Romaniuk: University of Paris 1 Panthéon-Sorbonne, PRISM, Postal: 1, rue Victor Cousin, 75005 PARIS, FRANCE
No DR 08006, ESSEC Working Papers from ESSEC Research Center, ESSEC Business School
Financial Newspapers have for long suggested that the Fed tends to provide additional Liquidity when the Stock Market thumbs. We provide a theoretical Explanation for this Behaviour that builds on the Methodology developed by Romaniuk (2008) for a central Banker with two main Goals, Output and Price stability. In this Paper, the Policymaker behaves as a Portfolio Manager who aims at stabilizing Output, Goods Prices, as well as Asset Prices. An optimal, Time-varying Interest Rate Rule is obtained as the Merton's (1971) continuous Time Solution to the Portfolio Manager's Problem. In a second Step, we infer the optimal Interest Rate Rule of a central Bank that can react differently to positive and negative Variations in the Stock Market.
Keywords: Optimal Interest Rate Rule; Portfolio Choice; Fed; Asset Prices; Options Theory (search for similar items in EconPapers)
JEL-codes: C61 E58 G11 (search for similar items in EconPapers)
Pages: 16 pages
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-ore
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