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Learning, Monetary Policy and Asset Prices
Author:
Mr. Marco Airaudo null

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Salvatore Nisticò null

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Luis-Felipe Zanna
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Series:
IMF Working Papers
Volume/Issue:
Volume 2015: Issue 016
Language:
English
Publication Date:
23 Jan 2015
DOI:
https://doi.org/10.5089/9781498343466.001
ISBN:
9781498343466
ISSN:
1018-5941
Pages:
34
Keywords:
WP; interest rate; Learning; Expectational Stability; Interest Rate Rules; Multiple Equilibria; Determinacy; Stock Prices; fluctuations feedback; interest rate rule; asset price shock; upper bound; supply-side effect of asset price fluctuation; stock price increase; asset price fluctuation; effect of asset price fluctuation; stock price fluctuation; shocks in a Fisherian; making stock price; Asset prices; Inflation; Consumption; Real wages; Global
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund