In the light of the recent financial crisis, we investigate the effects generated by limited asset market participation on optimal monetary and fiscal policy, where monetary and fiscal authority are independent and play strategically. We find that limited asset market participation strongly...

We consider a market economy where two rational agents are able to learn the distribution of future events. In this context, we study whether moving away from the standard Bayesian belief updating, in the sense of under-reaction to some degree to new information, may be strategically convenient...