TY  - JOUR
AU  - Gilchrist, Simon
AU  - Saito, Masashi
TI  - Expectations, Asset Prices, and Monetary Policy: The Role of Learning
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12442
PY  - 2006
Y2  - August 2006
DO  - 10.3386/w12442
UR  - http://www.nber.org/papers/w12442
L1  - http://www.nber.org/papers/w12442.pdf
N1  - Author contact info:
Simon Gilchrist
Department of Economics
New York University
19 West 4th Street.
New York, NY, 10003
Tel: 212 992 9770
Fax: NA
E-Mail: sg40@nyu.edu

Masashi Saito
E-Mail: MSaito2@imf.org
M1  - published as Simon Gilchrist, Masashi Saito. "Expectations, Asset Prices, and Monetary Policy: The Role of Learning," in John Y. Campbell, editor, "Asset Prices and Monetary Policy" University of Chicago Press (2008)

M3  - presented at "Asset Prices and Monetary Policy Conference", May 5-6, 2006
AB  - This paper studies the implications of financial market imperfections represented by a countercyclical external finance premium and the gradual recognition of changes in the drift of technology growth for the design of an interest rate rule. Asset price movements induced by changes in trend growth influence balance-sheet conditions that determine the external finance premium. Such movements are magnified when the private sector is imperfectly informed regarding the trend growth rate of technology. The presence of financial market imperfections provides a motivation for responding to the gap between the observed asset prices and the potential level of asset prices in addition to responding strongly to inflation. This is because the asset price gap represents distortions in the resource allocation induced by financial market imperfections more distinctly than inflation. The policymaker's imperfect information about the drift of technology growth renders imprecise the calculation of the potential and thus reduces the benefit of responding to the asset price gap. A policy that responds to the level of asset prices which does not take into account changes in potential tends to be welfare reducing.
ER  -