Asset Price Learning and Optimal Monetary Policy

60 Pages Posted: 16 Nov 2017 Last revised: 29 Mar 2019

See all articles by Colin Caines

Colin Caines

Board of Governors of the Federal Reserve System

Fabian Winkler

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: March 26, 2019

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 therefore raises interest rates when expected capital gains are high. When the asset is not in fixed supply, 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. Our results are robust to alternative belief specifications.

Keywords: Optimal Monetary Policy, Asset Prices, Natural Real Interest Rate, Learning, Leaning Against The Wind

JEL Classification: E44, E52

Suggested Citation

Caines, Colin and Winkler, Fabian, Asset Price Learning and Optimal Monetary Policy (March 26, 2019). Available at SSRN: https://ssrn.com/abstract=3070761 or http://dx.doi.org/10.2139/ssrn.3070761

Colin Caines

Board of Governors of the Federal Reserve System ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States

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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