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Optimal Monetary Policy and Stock-Prices Dynamics in a Non-Ricardian DSGE Model

Author

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  • Salvatore Nistico'

    (University of Rome La Sapienza and LUISS Guido Carli University)

Abstract

In a DSGE model with non-ricardian agents, a' la Blanchard-Yaari, stock-price fluctuations affect the dynamics of aggregate consumption through wealth effects. This wealth effects can be characterized as an additional dynamic distortion with respect to the social planner allocation, related to the cross sectional consumption dispersion that the decentralized allocation implies. By exploiting the specific cross-sectional distribution that the model implies for individual financial wealth, this paper derives the welfare criterion consistent with this economy, and shows that it features an additional target besides output-gap and price stability: financial stability. The ultimate implication is that price stability is no longer necessarily optimal, even absent cost push shocks. Given the quadratic form of the welfare criterion, some fluctuations in output and inflation will be optimal as long as they reduce the volatility of financial wealth.

Suggested Citation

  • Salvatore Nistico', 2011. "Optimal Monetary Policy and Stock-Prices Dynamics in a Non-Ricardian DSGE Model," Working Papers CASMEF 1107, Dipartimento di Economia e Finanza, LUISS Guido Carli.
    • Handle: RePEc:lui:casmef:1107
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    References listed on IDEAS

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    1. Marco Airaudo & Salvatore Nisticò & Luis‐Felipe Zanna, 2015. "Learning, Monetary Policy, and Asset Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(7), pages 1273-1307, October.
    2. Castelnuovo, Efrem & Nisticò, Salvatore, 2010. "Stock market conditions and monetary policy in a DSGE model for the U.S," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1700-1731, September.
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    7. Charles T. Carlstrom & Timothy Fuerst, 2007. "Asset Prices, Nominal Rigidities, and Monetary Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(2), pages 256-275, April.
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    9. Cúrdia, Vasco & Woodford, Michael, 2011. "The central-bank balance sheet as an instrument of monetarypolicy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 54-79, January.
    10. Vasco Cúrdia & Michael Woodford, 2010. "Credit Spreads and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 3-35, September.
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    17. repec:pri:cepsud:83svensson is not listed on IDEAS
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    Cited by:

    1. Benjamin Carton, 2012. "Monetary-Policy Tradeoff in Overlapping Generations DSGE Models," DEM Working Papers Series 028, University of Pavia, Department of Economics and Management.

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    More about this item

    Keywords

    Monetary Policy; DSGE Models; Stock Prices; Wealth Effects.;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • 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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