Asset price beliefs and optimal monetary policy

Journal of Monetary Economics, 2021, vol. 123, issue C, 53-67

Abstract: We characterize optimal monetary policy when agents learn about endogenous asset prices. Learning leads to inefficient asset price fluctuations and distortions in consumption and investment decisions. We find that the policy-relevant natural real interest rate increases with subjective asset price beliefs. Optimal monetary policy raises interest rates when expected capital gains are high, but does not eliminate deviations of asset prices from their fundamental value. When we add investment to the model, optimal policy also “leans against the wind”. In a simple calibration of the model, a positive response to capital gains in simple interest rate rules is beneficial.

Keywords: Optimal monetary policy; Asset prices; Natural real interest rate; Learning; Leaning against the wind (search for similar items in EconPapers)
JEL-codes: E44 E52 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304393221000817
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Asset Price Beliefs and Optimal Monetary Policy (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:123:y:2021:i:c:p:53-67

DOI: 10.1016/j.jmoneco.2021.07.006

Access Statistics for this article

Journal of Monetary Economics is currently edited by R. G. King and C. I. Plosser

More articles in Journal of Monetary Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().