The Equity Premium , Long-Run Risk , & Optimal Monetary Policy

  title={The Equity Premium , Long-Run Risk , & Optimal Monetary Policy},
  author={Anthony M. Diercks},
  • Anthony M. Diercks
  • Published 2015
In this study I examine the welfare implications of monetary policy by constructing a novel New Keynesian model that properly accounts for asset pricing facts. I find that the Ramsey optimal monetary policy yields an inflation rate above 3.5% and inflation volatility close to 1.5%. The same model calibrated to a counterfactually low equity premium implies an optimal inflation rate close to zero and inflation volatility less than 10 basis points, consistent with much of the existing literature… CONTINUE READING