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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.

Suggested Citation

  • Pierpaolo Beningo & Luigi Paciello, 2011. "Monetary Policy, Doubts and Asset Prices," 2011 Meeting Papers 857, Society for Economic Dynamics.
  • Handle: RePEc:red:sed011:857
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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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