Asset Price Learning and Optimal Monetary Policy
60 Pages Posted: 16 Nov 2017 Last revised: 29 Mar 2019
Date Written: March 26, 2019
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: Suggested Citation