Learning, Monetary Policy, and Asset Prices

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