Essays on monetary and fiscal policy

This paper investigates determinacy and E-stability under alternative interest rate rules granting an explicite response to asset prices (tobin’s q) in a New Keynesian model where the financial sector is affected by a moral hazard problem. We allow for varying degrees of inefficiency in financial intermediation. We show that strict inflation targeting can always attain determinacy and E-stability. Responding to asset prices is beneficial as determinacy/E-stability is granted also by mildly passive policy rules. Higher inefficiency in financial intermediation shrinks determinacy and E-stability regions without violating the Taylor principle. This result comes from a long-run comovement between inflation and asset prices being only weakened by distortions in financial intermediation.