"While the traditional view of financial innovation emphasizes the risk sharing role of new financial assets, belief disagreements about these assets naturally lead to speculation, which represents a powerful economic force in the opposite direction. This paper investigates the effect of...

The net effect of financial innovation on portfolio risks depends on the quantitative strength of its effects on the uninsurable and the speculative variances. I consider a calibration of the model for new assets linked to national incomes of G7 countries, which were recommended by Athanasoulis...

We analyze optimal monetary policy when asset prices influence aggregate demand with a lag (as is well documented). In this context, as long as the central bank's main objective is to minimize the output gap, the central bank optimally induces asset price overshooting in response to the...

We present evidence that noisy financial flows influence financial conditions and macroeconomic activity. How should monetary policy respond to this noise? We develop a model where it is optimal for the central bank to target and (partially) stabilize financial conditions beyond their direct...

Monetary policy transmits through broad financial conditions--interest rates, asset prices, credit spreads and exchange rates--rather than through the policy rate alone. Yet current frameworks remain anchored around r*, the neutral interest rate. We introduce FCI*, the neutral level of financial...