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Learning, Monetary Policy and Asset Prices

Author

Listed:
  • Marco Airaudo

    (School of Economics, LeBow College of Business, Drexel University)

  • Salvatore Nisticò

    (Dipartimento di Scienze Sociali ed Economiche, Sapienza University of Rome)

  • Luis-Felipe Zanna

    (Research Department, International Monetary Fund, Washington (DC))

Abstract

We explore the stability properties of interest rate rules granting an explicit response to stock prices in a New-Keynesian DSGE model populated by Blanchard-Yaari non-Ricardian households. The constant turnover between long-time stock holders and asset-poor newcomers generates a financial wealth channel where the wedge between current and expected future aggregate consumption is affected by the market value of financial wealth, making stock prices non-redundant for the business cycle. We fi nd that if the financial wealth channel is sufficiently strong responding to stock prices enlarges the policy space for which the rational expectations equilibrium is both determinate and learnable (in the E-stability sense of Evans and Honkapohja, 2001). In particular, the Taylor principle ceases to be necessary, and also mildly passive policy responses to in ation lead to determinacy and E-stability. Our results appear to be more prominent in economies characterized by a lower elasticity of substitution across differentiated products and/or more rigid labor markets.

Suggested Citation

  • Marco Airaudo & Salvatore Nisticò & Luis-Felipe Zanna, 2014. "Learning, Monetary Policy and Asset Prices," Working Papers 4/14, Sapienza University of Rome, DISS.
  • Handle: RePEc:saq:wpaper:4/14
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    More about this item

    Keywords

    Learning; Expectational Stability; Interest Rate Rules; Multiple Equilibria; Determinacy; Stock Prices;
    All these keywords.

    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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