Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
The Role of Learning for Asset Prices and Business Cycles
I examine the implications of learning-based asset pricing in a model in which firms face credit constraints that depend partly on their market value. Agents learn about stock prices, but have conditionally model-consistent expectations otherwise. The model jointly matches key asset price and business cycle statistics, while the combination of financial frictions and learning produces powerful feedback between asset prices and real activity, adding substantial amplification. The model reproduces many patterns of forecast error predictability in survey data that are inconsistent with rational expectations. A reaction of the monetary policy rule to asset price growth increases welfare under learning.
Cite this item
Fabian Winkler, The Role of Learning for Asset Prices and Business Cycles, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2016-019, 20 Jan 2016, revised 01 Mar 2017.
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
Keywords: Asset Pricing; Credit Constraints; Expectations; Financial Frictions; Learning; Monetary policy; Survey Data; Survey Forecasts
This item with handle RePEc:fip:fedgfe:2016-19
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