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Monetary policy rules, asset prices and adaptive learning

  • Machado, Vicente da Gama

Following the damaging real effects of asset price fluctuations over the recent financial crisis, the debate on the appropriate role of such prices in a monetary policy context has gained renewed attention. This paper argues that a direct monetary policy response to asset prices is not desirable under common instrumental rate rules. To illustrate this point, we build an adaptive learning model, that extends existing learning models in monetary policy, most notably, Bullard and Mitra (2002). The result remains valid in a context with heterogeneous beliefs and is robust to an optimal monetary policy rule including a weight on asset prices.

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Article provided by Elsevier in its journal Journal of Financial Stability.

Volume (Year): 9 (2013)
Issue (Month): 3 ()
Pages: 251-258

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Handle: RePEc:eee:finsta:v:9:y:2013:i:3:p:251-258
Contact details of provider: Web page: http://www.elsevier.com/locate/jfstabil

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  1. Ben S. Bernanke, 2007. "Inflation expectations and inflation forecasting," Speech 306, Board of Governors of the Federal Reserve System (U.S.).
  2. Ida, Daisuke, 2011. "Monetary policy and asset prices in an open economy," The North American Journal of Economics and Finance, Elsevier, vol. 22(2), pages 102-117, August.
  3. James B. Bullard & Kaushik Mitra, 2002. "Learning about monetary policy rules," Working Papers 2000-001, Federal Reserve Bank of St. Louis.
  4. Pfajfar, Damjan & Santoro, Emiliano, 2014. "Credit Market Distortions, Asset Prices And Monetary Policy," Macroeconomic Dynamics, Cambridge University Press, vol. 18(03), pages 631-650, April.
  5. Honkapohja, S. & Mitra, K., 2001. "Are Non-Fundamental Equilibria Learnable in Models of Monetary Policy?," University of Helsinki, Department of Economics 501, Department of Economics.
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  12. Branch, William A., 2007. "Sticky information and model uncertainty in survey data on inflation expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 245-276, January.
  13. Hommes, Cars H., 2006. "Heterogeneous Agent Models in Economics and Finance," Handbook of Computational Economics, in: Leigh Tesfatsion & Kenneth L. Judd (ed.), Handbook of Computational Economics, edition 1, volume 2, chapter 23, pages 1109-1186 Elsevier.
  14. George W. Evans & Seppo Honkapohja, 2002. "Adaptive Learning and Monetary Policy Design," University of Oregon Economics Department Working Papers 2002-18, University of Oregon Economics Department, revised 04 Mar 2004.
  15. Guse, Eran A., 2005. "Stability properties for learning with heterogeneous expectations and multiple equilibria," Journal of Economic Dynamics and Control, Elsevier, vol. 29(10), pages 1623-1642, October.
  16. McCallum, Bennett T., 1999. "Issues in the design of monetary policy rules," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 23, pages 1483-1530 Elsevier.
  17. Evans, George W. & Honkapohja, Seppo, 2001. "Expectations and the Stability Problem for Optimal Monetary Policies," CEPR Discussion Papers 2805, C.E.P.R. Discussion Papers.
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  19. James B. Bullard, 2010. "Three lessons for monetary policy from the panic of 2008," Review, Federal Reserve Bank of St. Louis, issue May, pages 155-163.
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