Asset prices and the equity premium might reflect doubts and pessimism. Introducing these features in an otherwise standard New-Keynesian model changes optimal policy in a substantial way. There are three main results: (i) asset-price movements improve the inflation-output trade-off so that average output can rise without much inflation costs; (ii) a “paternalistic” policymaker – maximizing the expected utility of the consumers under the true probability distribution – chooses a more accommodating policy towards productivity shocks and inflates the equity premium; (iii) a “benevolent” policymaker – maximizing the objective through which decisionmakers act in their ambiguous world – follows a policy of price stability.

Monetary Policy, Doubts and Asset Prices / Benigno, Pierpaolo; Luigi, Paciello. - In: JOURNAL OF MONETARY ECONOMICS. - ISSN 0304-3932. - 64:(2014), pp. 85-98. [10.1016/j.jmoneco.2014.02.004]

Monetary Policy, Doubts and Asset Prices

BENIGNO, PIERPAOLO;
2014

Abstract

Asset prices and the equity premium might reflect doubts and pessimism. Introducing these features in an otherwise standard New-Keynesian model changes optimal policy in a substantial way. There are three main results: (i) asset-price movements improve the inflation-output trade-off so that average output can rise without much inflation costs; (ii) a “paternalistic” policymaker – maximizing the expected utility of the consumers under the true probability distribution – chooses a more accommodating policy towards productivity shocks and inflates the equity premium; (iii) a “benevolent” policymaker – maximizing the objective through which decisionmakers act in their ambiguous world – follows a policy of price stability.
Monetary Policy, Doubts and Asset Prices / Benigno, Pierpaolo; Luigi, Paciello. - In: JOURNAL OF MONETARY ECONOMICS. - ISSN 0304-3932. - 64:(2014), pp. 85-98. [10.1016/j.jmoneco.2014.02.004]
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11385/90181
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