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Asset price beliefs and optimal monetary policy

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  • Caines, Colin
  • Winkler, Fabian

Abstract

We characterize optimal monetary policy when agents learn about endogenous asset prices. Learning leads to inefficient asset price fluctuations and distortions in consumption and investment decisions. We find that the policy-relevant natural real interest rate increases with subjective asset price beliefs. Optimal monetary policy raises interest rates when expected capital gains are high, but does not eliminate deviations of asset prices from their fundamental value. When we add investment to the model, optimal policy also “leans against the wind”. In a simple calibration of the model, a positive response to capital gains in simple interest rate rules is beneficial.

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  • Caines, Colin & Winkler, Fabian, 2021. "Asset price beliefs and optimal monetary policy," Journal of Monetary Economics, Elsevier, vol. 123(C), pages 53-67.
    • Handle: RePEc:eee:moneco:v:123:y:2021:i:c:p:53-67
    DOI: 10.1016/j.jmoneco.2021.07.006
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    3. Ioana Manuela Mîndrican, 2023. "Monetary policy measures and strategies in the context of the adoption of the euro currency," Journal of Financial Studies, Institute of Financial Studies, vol. 8(14), pages 84-97, May.
    4. Polyzos, Efstathios, 2022. "Examining the asymmetric impact of macroeconomic policy in the UAE: Evidence from quartile impulse responses and machine learning," The Journal of Economic Asymmetries, Elsevier, vol. 26(C).

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    More about this item

    Keywords

    Optimal monetary policy; Asset prices; Natural real interest rate; Learning; Leaning against the wind;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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