Monetary Policy, Doubts and Asset Prices

36 Pages Posted: 27 Sep 2010 Last revised: 10 Apr 2023

See all articles by Pierpaolo Benigno

Pierpaolo Benigno

University of Bern - Department of Economics

Luigi Paciello

Einaudi Institute for Economics and Finance (EIEF)

Date Written: September 2010

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 the nature of the policy that maximizes the welfare of the consumers in the model. First, following productivity shocks, optimal policy in this model is more accommodating than in a standard New-Keynesian model, and may even 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 may result in lower average welfare than a more flexible inflation-targeting policy, which instead increases the comovements between inflation, asset prices and output growth.

Suggested Citation

Benigno, Pierpaolo and Paciello, Luigi, Monetary Policy, Doubts and Asset Prices (September 2010). NBER Working Paper No. w16386, Available at SSRN: https://ssrn.com/abstract=1683136

Pierpaolo Benigno (Contact Author)

University of Bern - Department of Economics ( email )

Schanzeneckstrasse 1
Bern, CH-3001
Switzerland

Luigi Paciello

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Due Macelli, 73
Rome, 00187
Italy

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