Asset prices and the equity premium might reflect doubts and pessimism. Introducing these features in an otherwise standard New-Keynesian model changes optimal policy in a substantial way. There are three main results: (i) asset-price movements improve the inflation-output trade-off so that...

We extend a standard New Keynesian model to allow an analysis of "unconventional" dimensions of policy alongside traditional interest-rate policy. We find that quantitative easing in the strict sense is likely to be ineffective, but that targeted asset purchases by a central bank can instead be...

We consider optimal monetary stabilization policy in a New Keynesian model with explicit microfoundations, when the central bank recognizes that private-sector expectations need not be precisely model-consistent, and wishes to choose a policy that will be as good as possible in the case of any...