#2239. Asset price beliefs and optimal monetary policy

October 2026publication date
Proposal available till 30-05-2025
4 total number of authors per manuscript6020 $

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Journal’s subject area:
Finance;
Economics and Econometrics;
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Abstract:
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 raises interest rates when expected capital gains are high, but does not eliminate deviations of asset prices from their fundamental value. When we add investment to the model, 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.
Keywords:
Asset prices; Natural real interest rate; Optimal monetary policy

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