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Learning, Monetary Policy, and Asset Prices

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  • MARCO AIRAUDO
  • SALVATORE NISTICÒ
  • LUIS‐FELIPE ZANNA

Abstract

We explore the stability properties of interest rate rules granting an explicit response to stock prices in a New Keynesian DSGE model where the presence of non‐Ricardian households makes stock prices nonredundant for the business cycle. We find that responding to stock prices enlarges the policy space for which the equilibrium is both determinate and E‐stable (learnable). In particular, the Taylor principle ceases to be necessary, and determinacy/E‐stability is granted also by mildly passive policy rules. Our results appear to be more prominent in economies featuring a lower elasticity of substitution across differentiated products and/or more rigid labor markets.

Suggested Citation

  • 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.
  • Handle: RePEc:wly:jmoncb:v:47:y:2015:i:7:p:1273-1307
    DOI: 10.1111/jmcb.12245
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    3. Benjamin Carton, 2012. "Monetary-Policy Tradeoff in Overlapping Generations DSGE Models," DEM Working Papers Series 028, University of Pavia, Department of Economics and Management.
    4. Milani, Fabio, 2017. "Learning about the interdependence between the macroeconomy and the stock market," International Review of Economics & Finance, Elsevier, vol. 49(C), pages 223-242.
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    6. Muhammad Ali Nasir & Milton Yago & Alaa M. Soliman & Junjie Wu, 2016. "Financial stability, wealth effects and optimal macroeconomic policy combination in the United Kingdom: A new-Keynesian dynamic stochastic general equilibrium framework," Cogent Economics & Finance, Taylor & Francis Journals, vol. 4(1), pages 1136098-113, December.
    7. Manuk Ghazanchyan, 2014. "Unraveling the Monetary Policy Transmission Mechanism in Sri Lanka," IMF Working Papers 2014/190, International Monetary Fund.
    8. Gilles Dufrénot & Anwar Khayat, 2014. "Monetary Policy Switching in the Euro Area and Multiple Equilibria: An Empirical Investigation," AMSE Working Papers 1408, Aix-Marseille School of Economics, France, revised Jan 2014.
    9. André, Marine Charlotte & Dai, Meixing, 2017. "Is central bank conservatism desirable under learning?," Economic Modelling, Elsevier, vol. 60(C), pages 281-296.
    10. Kitney, Paul, 2018. "Financial factors and monetary policy: Determinacy and learnability of equilibrium," Journal of Economic Dynamics and Control, Elsevier, vol. 90(C), pages 194-207.
    11. 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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    13. Roberta CARDANI, 2008. "Optimal Monetary Policy with Wealth Effect and Cost Channel," EcoMod2008 23800021, EcoMod.
    14. Airaudo, Marco & Cardani, Roberta & Lansing, Kevin J., 2013. "Monetary policy and asset prices with belief-driven fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1453-1478.
    15. Adebayo Adebiyi & Charles N. O. Mordi, 2012. "A Dynamic Stochastic General Equilibrium (Dsge) Model Of Oil Price Shocks And Exchange Rate Pass-Through To Domestic Inflation In Nigeria," EcoMod2012 3715, EcoMod.
    16. Tiziana Assenza & Michele Berardi & Domenico Delli Gatti, 2015. "Was Bernanke Right? Targeting Asset Prices May : not: be a Good Idea After All," International Symposia in Economic Theory and Econometrics, in: William A. Barnett & Fredj Jawadi (ed.), Monetary Policy in the Context of the Financial Crisis: New Challenges and Lessons, volume 24, pages 451-496, Emerald Publishing Ltd.
    17. Vicente da Gama Machado, 2012. "Monetary Policy, Asset Prices and Adaptive Learning," Working Papers Series 274, Central Bank of Brazil, Research Department.
    18. Castelnuovo, Efrem, 2013. "Monetary policy shocks and financial conditions: A Monte Carlo experiment," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 282-303.
    19. Muhammad Ali Nasir & Alaa M. Soliman, 2014. "Aspects of Macroeconomic Policy Combinations and Their Effects on Financial Markets," Economic Issues Journal Articles, Economic Issues, vol. 19(1), pages 95-118, March.
    20. Marine Charlotte André & Meixing Dai, 2018. "The limits to robust monetary policy in a small open economy with learning agents," Working Papers of BETA 2018-45, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    21. 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.
    22. Assenza, T. & Berardi, M. & Delli Gatti, D., 2009. "Asset Prices and Monetary Policy: A New View of the Cost Channel," CeNDEF Working Papers 09-17, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
    23. Eurilton Araújo, 2016. "Monetary Policy Credibility and the Comovement between Stock Returns and Inflation," Working Papers Series 449, Central Bank of Brazil, Research Department.

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    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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