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Monetary Policy, Doubts and Asset Prices

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  • Pierpaolo Beningo

    (LUISS, Rome)

  • Luigi Paciello

    (EIEF, Rome)

Abstract

Asset prices and the equity premium might reflect doubts and pessimism. Introducing these features in an otherwise standard New-Keynesian model changes in a quite substantial way its normative conclusions. First, following productivity shocks, optimal policy should be very accommodative even to the point to inflate the equity premium. Second, asset-price movements improve the inflation-output trade-off so that average output can rise without increasing much average inflation. Finally, a strict inflation-targeting policy is dominated by more flexible inflation-targeting policies which increase the comovements between inflation, asset prices and output growth.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 857.

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Date of creation: 2011
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Handle: RePEc:red:sed011:857

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  1. Dennis, Richard & Leitemo, Kai & Söderström, Ulf, 2007. "Monetary Policy in a Small Open Economy with a Preference for Robustness," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6067, C.E.P.R. Discussion Papers.
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  3. Peter J. Klenow & Oleksiy Kryvtsov, 2007. "State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation?," Discussion Papers, Stanford Institute for Economic Policy Research 07-007, Stanford Institute for Economic Policy Research.
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Cited by:
  1. Adam, Klaus & Woodford, Michael, 2012. "Robustly optimal monetary policy in a microfounded New Keynesian model," Journal of Monetary Economics, Elsevier, Elsevier, vol. 59(5), pages 468-487.
  2. Vicente da Gama Machado, 2012. "Monetary Policy, Asset Prices and Adaptive Learning," Working Papers Series, Central Bank of Brazil, Research Department 274, Central Bank of Brazil, Research Department.
  3. Frank Hespeler & Marco M. Sorge, 2013. "Does Near-Rationality Matter in First-Order Approximate Solutions? A Perturbation Approach," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 339, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.

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