Monetary policy reacting to asset price fluctuations stabilizes economy, lowers volatility.
The study shows that when monetary policy reacts to changes in asset prices, taking into account how people form expectations about policy changes, it can help stabilize the economy. By using a different policy rule that responds to asset prices, inflation and output volatility can be reduced. This means that considering how people expect policy changes and asset price movements can give policymakers more options to keep the economy stable.