IDEAS home Printed from
   My bibliography  Save this paper

Learning, the Stock Market and Monetary Policy


  • Marco Airaudo

    (Humboldt Universitat zu Berlin)

  • Salvatore Nistico'

    (LUISS University, Rome)

  • Luis-Felipe Zanna

    (Board of Governors of the Federal Reserve System)


We investigate whether monetary policy defined as an interest rate rule should respond to stock prices fluctuations under the following two criteria: 1) the rule must guarantee a unique equilibrium and 2) the MSV representation of this unique equilibrium must be learnable in the E-stability sense. We conduct our analysis in a New Keynesian version of the Blanchard-Yaari "perpetual youth" model with risky equities. Stock prices fluctuations have real effects trough a demand channel since the dynamics of aggregate financial wealth is relevant for current aggregate consumption as well as for current inflation. We find that regardless of the timing of the rule, if the central bank reacts to the deviation of the stock price level from a target then the higher the reaction to this deviation, the higher should be the response to inflation in order to guarantee equilibrium determinacy and E-stability of the MSV representation. When instead the interest rate responds passively to changes in the stock price level, then the Taylor principle with respect to inflation is enough to guarantee E-stability and determinacy, regardless of the timing of the rule. Preliminary results show that the optimal monetary policy is also E-unstable. This can be overcome if private expectations about inflation, output gap and stock prices are observed and incorporated into an interest rate rule.

Suggested Citation

  • Marco Airaudo & Salvatore Nistico' & Luis-Felipe Zanna, 2006. "Learning, the Stock Market and Monetary Policy," Computing in Economics and Finance 2006 420, Society for Computational Economics.
  • Handle: RePEc:sce:scecfa:420

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    More about this item


    Learning; Expectational Stability; Interest Rate Rules; Multiple Equilibria; Determinacy; Stock Market; Asset Prices;

    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


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sce:scecfa:420. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.