The Role of Learning for Asset Prices and Business Cycles

FEDS Working Paper No. 2016-019

https://doi.org/10.17016/FEDS.2016.019r1

58 Pages Posted: 22 Mar 2016

See all articles by Fabian Winkler

Fabian Winkler

Board of Governors of the Federal Reserve System

Date Written: 2016-01-20

Abstract

I examine the implications of learning-based asset pricing in a model in which firms face credit constraints that depend partly on their market value. Agents learn about stock prices, but have conditionally model-consistent expectations otherwise. The model jointly matches key asset price and business cycle statistics, while the combination of financial frictions and learning produces powerful feedback between asset prices and real activity, adding substantial amplification. The model reproduces many patterns of forecast error predictability in survey data that are inconsistent with rational expectations. A reaction of the monetary policy rule to asset price growth increases welfare under learning.

Keywords: Asset Pricing, Credit Constraints, Expectations, Financial Frictions, Learning, Monetary policy, Survey Data, Survey Forecasts

JEL Classification: D83, E32, E44, E52, G12

Suggested Citation

Winkler, Fabian, The Role of Learning for Asset Prices and Business Cycles (2016-01-20). FEDS Working Paper No. 2016-019. Available at SSRN: https://ssrn.com/abstract=2752862 or http://dx.doi.org/10.17016/FEDS.2016.019r1

Fabian Winkler (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://www.fabianwinkler.com

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