Learning, Monetary Policy and Asset Prices

By Marco Airaudo, Salvatore Nisticò, Luis-Felipe Zanna

January 23, 2015

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Marco Airaudo, Salvatore Nisticò, and Luis-Felipe Zanna. Learning, Monetary Policy and Asset Prices, (USA: International Monetary Fund, 2015) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We explore the stability properties of interest rate rules granting an explicit response to stock prices in a New-Keynesian DSGE model populated by Blanchard-Yaari non-Ricardian households. The constant turnover between long-time stock holders and asset-poor newcomers generates a financial wealth channel where 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 if the financial wealth channel is sufficiently strong, responding to stock prices enlarges the policy space for which the rational expectations equilibrium is both determinate and learnable (in the E-stability sense of Evans and Honkapohja, 2001). In particular, the Taylor principle ceases to be necessary and also mildly passive policy responses to inflation lead to determinacy and E-stability. Our results appear to be more prominent in economies characterized by a lower elasticity of substitution across differentiated products and/or more rigid labor markets.

Subject: Asset prices, Consumption, Inflation, Labor, National accounts, Prices, Real wages

Keywords: Asset price fluctuation, Asset price shock, Asset prices, Consumption, Determinacy, Effect of asset price fluctuation, Expectational Stability, Fluctuations feedback, Global, Inflation, Interest rate, Interest rate rule, Interest Rate Rules, Learning, Making stock price, Multiple Equilibria, Real wages, Shocks in a Fisherian, Stock price fluctuation, Stock price increase, Stock Prices, Supply-side effect of asset price fluctuation, Upper bound, WP

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/016
Stock No:

WPIEA2015016
ISBN:

9781498343466
ISSN:

1018-5941

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