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

  • Salvatore Nistico'

    ()

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

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.

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Paper provided by Dipartimento di Economia e Finanza, LUISS Guido Carli in its series Working Papers CASMEF with number 1107.

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Date of creation: 2011
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Handle: RePEc:lui:casmef:1107
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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. Piergallini, Alessandro, 2004. "Real Balance Effects, Determinacy and Optimal Monetary Policy," MPRA Paper 59832, University Library of Munich, Germany.
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