Monetary policy and asset prices with belief-driven fluctuations

Airaudo, Marco; Cardani, Roberta; Lansing, Kevin J.

doi:10.1016/j.jedc.2013.03.002

Cited by 18 publications

(18 citation statements)

References 55 publications

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“…Gilchrist and Saito (2008) …nd that an interest-rate response to asset price growth is helpful in stabilizing an economy with rational learning about unobserved shifts in the economy's stochastic growth trend. Airaudo et al (2012) …nd that an interest-rate response to stock prices can stabilize an economy against sunspot shocks in a rational expectations model with multiple equilibria. Our analysis di¤ers from these papers in that we allow a subset agents to depart from fully-rational expectations.…”

Section: Related Literaturementioning

confidence: 99%

House Prices, Credit Growth, and Excess Volatility: Implications for Monetary and Macroprudential Policy

Gelain¹,

Lansing

Mendicino

2012

SSRN Journal

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Progress on the question of whether policymakers should respond directly to …nancial variables requires a realistic economic model that captures the links between asset prices, credit expansion, and real economic activity. Standard DSGE models with fully-rational expectations have di¢ culty producing large swings in house prices and household debt that resemble the patterns observed in many industrial countries over the past decade. We show that the introduction of simple moving-average forecast rules for a subset of households can signi…cantly magnify the volatility and persistence of house prices and household debt relative to otherwise similar model with fully-rational expectations. We evaluate various policy actions that might be used to dampen the resulting excess volatility, including a direct response to house price growth or credit growth in the central bank's interest rate rule, the imposition of a more restrictive loan-to-value ratio, and the use of a modi…ed collateral constraint that takes into account the borrower's wage income. Of these, we …nd that a loan-to-income type constraint is the most e¤ective tool for dampening overall excess volatility in the model economy. We …nd that while an interest-rate response to house price growth or credit growth can stabilize some economic variables, it can signi…cantly magnify the volatility of others, particularly in ‡ation.

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Section: Related Literaturementioning

confidence: 99%

House Prices, Credit Growth, and Excess Volatility: Implications for Monetary and Macroprudential Policy

Gelain¹,

Lansing

Mendicino

2012

SSRN Journal

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“…However, after the recent financial crisis, the nexus between financial sector and real economy has been widely acknowledged (Airaudo, Cardani, & Lansing, 2011;Funke, Paetz, & Pytlarczyk, 2011;Nasir, Ahmad, Ahmad, & Wu, 2015;Tsouma, 2009) as Borio (2011, p. 25) stated that "financial and macroeconomic stabilities are two sides of the same coin and monetary policy plays a critical role in both". For example, scholars argued that the price and output stabilities do not necessarily ensure financial stability and macroeconomic policy targeting alone may not produce optimal economic outcomes (Mishkin, 2011;Williams, 2012), the financially augmented monetary policy (Taylor Type rules) could help to reduce economic fluctuations (Cúrdia & Woodford, 2011), and asset prices and leverage of agents should also be in the sight of policymakers (Blanchard, Dell'Ariccia, & Mauro, 2010).…”

Section: Introductionmentioning

confidence: 99%

“…The increase in the value of assets can lead to an increase in wealth of their holders and result in increased consumption and economic growth (Airaudo et al, 2011;Caporale & Soliman, 2010;Case, Quigley, & Shiller, 2012). Moreover, the wealth effects differ in countries with various weightings of the financial sector in the national economy.…”

Section: Introductionmentioning

confidence: 99%

“…For example, Carroll (2004) argued that wealth effects mostly persist in the medium term and also confirmed by Carroll, Otsuka, and Slacalek (2011); the financial stability is defined as the oscillation of financial asset prices and performances of financial (stock and bond) markets (Foot, 2003;Khorasgani, 2010, pp. 20-21); an increase in wealth is attributed to a rise in asset prices (see Airaudo et al, 2011;Funke et al, 2011;Malikane & Semmler, 2008); stock prices are significant indicators of financial crises (Broome & Morley, 2004).…”

Section: Introductionmentioning

confidence: 99%

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Financial stability, wealth effects and optimal macroeconomic policy combination in the United Kingdom: A new-Keynesian dynamic stochastic general equilibrium framework

Nasir

Yago

Soliman

et al. 2016

Cogent Economics & Finance

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This study derives an optimal macroeconomic policy combination for financial sector stability in the United Kingdom by employing a New Keynesian Dynamic Stochastic General Equilibrium (NK-DSGE) framework. The empirical results obtained show that disciplined fiscal and accommodative monetary policies stance is optimal for financial sector stability. Furthermore, fiscal indiscipline countered by contractionary monetary stance adversely affects financial sector stability. Financial markets, e.g. stocks and Gilts show a short-term asymmetric response to macroeconomic policy interaction and to each other. The asymmetry is a reflection of portfolio adjustment. However in the long-run, the responses to suggested optimal policy combination had homogenous effects and there was evidence of co-movement in the stock and Gilt markets.

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“…An FWC could indeed be built into a New Keynesian model alongside a financial accelerator à la Bernanke, Gertler, and Gilchrist, or other forms of financial/credit frictions, thereby providing a framework with both demand‐side and supply‐side transmission channels of financial shocks. Airaudo, Cardani, and Lansing () make some progress in this direction showing that a credit channel, on top of the FWC, makes responding to stock prices even more beneficial for equilibrium determinacy…”

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confidence: 99%

Learning, Monetary Policy, and Asset Prices

Airaudo¹,

Nisticò²,

Zanna

2015

J of Money Credit Banking

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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

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Monetary policy and asset prices with belief-driven fluctuations

Cited by 18 publications

References 55 publications

House Prices, Credit Growth, and Excess Volatility: Implications for Monetary and Macroprudential Policy

House Prices, Credit Growth, and Excess Volatility: Implications for Monetary and Macroprudential Policy

Financial stability, wealth effects and optimal macroeconomic policy combination in the United Kingdom: A new-Keynesian dynamic stochastic general equilibrium framework

Learning, Monetary Policy, and Asset Prices

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