Impact of monetary policy on asset prices : lessons from a MIU model applied to the Fed Abstract -A tractable consumption-based and money-based asset pricing model is built to relate in closed form the risk premium, the risk free rate and the volatility of asset price to parameters of monetary policy. When applied to the Fed, the analysis shows that the monetary policy may have a destabilizing impact on asset prices. When equilibrium exists, the monetary policy contributes little to the equity premium, and does reduce the volatility of equity price only if the representative agent has a low preference for liquidity. As a result, this preference should be low, in order that objectives of macroeconomic and financial stabilization match up.
