Monetary Policy, Doubts and Asset Prices

Pierpaolo Benigno and Luigi Paciello ()

No 1024, EIEF Working Papers Series from Einaudi Institute for Economics and Finance (EIEF)

Abstract: Asset prices and the equity premium might reflect doubts and pessimism. Introducing these features in an otherwise standard New-Keynesian model changes in a quite substantial way its normative conclusions. First, following productivity shocks, optimal policy should be very accommodative even to the point to inflate the equity premium. Second, asset-price movements improve the inflation-output trade-off so that average output can rise without increasing much average inflation. Finally, a strict inflation-targeting policy is dominated by more flexible inflation targeting policies which increase the comovements between inflation, asset prices and output growth.

Pages: 35 pages
Date: 2010, Revised 2010-09
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Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Monetary policy, doubts and asset prices (2014)
Working Paper: Monetary Policy, Doubts and Asset Prices (2011)
Working Paper: Monetary Policy, Doubts and Asset Prices (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eie:wpaper:1024

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