Asset Price Learning and Optimal Monetary Policy
43 Pages Posted: 16 Nov 2017 Last revised: 1 Jun 2018
Date Written: May 25, 2018
We characterize optimal monetary policy when agents are learning about endogenous asset prices. Boundedly rational expectations induce inefficient equilibrium asset price fluctuations which translate into inefficient aggregate demand fluctuations. We find that the optimal policy raises interest rates when expected capital gains, and the level of current asset prices, is high. The optimal policy does not eliminate deviations of asset prices from their fundamental value. When monetary policymakers are information-constrained, optimal policy can be reasonably approximated by simple interest rate rules that incorporate capital gains. Our results are robust to a wide range of belief specifications as well as to the inclusion of an investment channel.
Keywords: Optimal Monetary Policy, Natural Real Interest Rate, Learning, Asset Price Volatility
JEL Classification: E44, E52
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