Learning, optimal monetary delegation and stock prices dynamics

Marine André and Meixing Dai ()

Working Papers of BETA from Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg

Abstract: This paper studies how learning affects the interactions between monetary policy and stock prices. Learning modifes the intertemporal trade-off of the central bank by giving to the latter the possibility to manipulate private expectations. The result of this manipulation is not socially optimal since it reduces excessively the stabilization bias. To remedy this, the government should appoint a central banker that is less conservative than the society. The turnover rate in the stock market is the key factor that determines the interactions between monetary policy (hence delegation) and stock prices. A positive turnover rate means that the presence of stocks in the households' portfolios distorts the optimal consumption path. This type of distortion compensates somehow these induced by learning. The central bank should be more conservative to avoid the effect of distortions on social welfare induced by learning than in the absence of stocks.

Keywords: adaptive learning; stabilization bias; inflation penalty; optimal monetary delegation; central bank conservatism; stock prices. (search for similar items in EconPapers)
JEL-codes: C62 D83 D84 E52 E58 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:ulp:sbbeta:2017-37

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