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Learning, Monetary Policy, and Asset Prices
Author(s) -
AIRAUDO MARCO,
NISTICÒ SALVATORE,
ZANNA LUISFELIPE
Publication year - 2015
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12245
Subject(s) - determinacy , dynamic stochastic general equilibrium , economics , monetary policy , elasticity of substitution , new keynesian economics , stock (firearms) , monetary economics , business cycle , keynesian economics , interest rate , econometrics , macroeconomics , mechanical engineering , mathematical analysis , mathematics , production (economics) , engineering
We explore the stability properties of interest rate rules granting an explicit response to stock prices in a New Keynesian DSGE model where the presence of non‐Ricardian households makes stock prices nonredundant for the business cycle. We find that responding to stock prices enlarges the policy space for which the equilibrium is both determinate and E‐stable (learnable). In particular, the Taylor principle ceases to be necessary, and determinacy/E‐stability is granted also by mildly passive policy rules. Our results appear to be more prominent in economies featuring a lower elasticity of substitution across differentiated products and/or more rigid labor markets.