Learning, Monetary Policy and Asset Prices

Marco Airaudo (), Salvatore Nisticò and Luis-Felipe Zanna ()
Additional contact information
Luis-Felipe Zanna: Research Department, International Monetary Fund, Postal: 700 19th Street, N.W. , Washington, D.C., 2043

No 2012-12, School of Economics Working Paper Series from LeBow College of Business, Drexel University

Abstract: We assess the conditions under which an interest rate rule granting an explicit response to stock prices can shield the economy against endogenous aggregate instability in the form of fluctuations driven by self-fulfilling beliefs, and fundamental equilibria that are not learnable in the Expectational Stability sense of Evans and Honkapohja (2001). To do so, we use a New-Keynesian DSGE model populated by Blanchard-Yaari non-Ricardian households. The constant turnover between long-time traders (holding assets) and newcomers (entering the market with no wealth at all) implies that the wedge between current and expected future aggregate consumption is affected by the market value of financial wealth, making stock prices non-redundant for the business cycle. We find that such policy is prone to generate non-fundamental fluctuations or fundamental fluctuations that are not learnable, unless both the turnover rate in markets and average profitability from investing in risky equity are significantly large. However, this appears to be the exception for most reasonable model calibrations, implying that, absent additional frictions, a systematic response to stock prices by monetary policy remains a bad idea in the New-Keynesian paradigm.

Keywords: Learning; Expectational Stability; Interest Rate Rules; Multiple Equilibria; Determinacy; Stock Prices (search for similar items in EconPapers)
JEL-codes: E40 E50 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2012-02-08
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Related works:
Journal Article: Learning, Monetary Policy, and Asset Prices (2015)
Working Paper: Learning, Monetary Policy and Asset Prices (2015)
Working Paper: Learning, Monetary Policy and Asset Prices (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:drxlwp:2012_012

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