The role of asset prices in transmitting monetary and other shocks

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The role of asset prices in transmitting monetary and other shocks

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Stephen P Millard
Simon J Wells

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Stephen Millard

Abstract

In this paper framework is constructed within which the ability of asset prices to convey information about the underlying shocks hitting the economy can be assessed. An identified VAR is used to establish a set of stylised facts as to how asset prices respond to exogenous monetary policy movements. A theoretical model of the economy is then developed, and used to analyse how asset prices modelled within it respond to different shocks. Consumers in the model consume both market-produced and home-produced goods. There are two types of firms: those producing traded goods sold on competitive world markets and those producing non-traded goods. Non-traded goods producers face costs of adjusting their capital stocks and can only reset their prices once a year in a staggered fashion. It is shown that the model is able to replicate the stylised facts found in the empirical exercise. It is then shown how asset prices respond to shocks to productivity in the traded, non-traded and household production sectors and a shock to the world price of traded goods. With these results, it is possible to assess what information asset prices may give us about the shocks affecting the economy at any particular time.

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Paper provided by Bank of England in its series Bank of England working papers with number 188.

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Handle: RePEc:boe:boeewp:188

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This paper has been announced in the following NEP Reports:

NEP-ALL-2003-06-25 (All new papers)
NEP-MAC-2003-06-25 (Macroeconomics)
NEP-MON-2003-06-25 (Monetary Economics)
NEP-RMG-2003-06-25 (Risk Management)

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Bojan Markovic, . "Bank capital channels in the monetary transmission mechanism," Bank of England working papers 313, Bank of England. [Downloadable!]
Vincent Labhard & Gabriel Sterne & Chris Young, . "Wealth and consumption: an assessment of the international evidence," Bank of England working papers 275, Bank of England. [Downloadable!]
Belke, Ansgar & Orth, Walter & Setzer, Ralph, 2008. "Liquidity and the dynamic pattern of price adjustment: a global view," Discussion Paper Series 1: Economic Studies 2008,25, Deutsche Bundesbank, Research Centre. [Downloadable!]
Dai, Meixing & Sidiropoulos, Moïse, 2005. "Flexibility in inflation targeting, financial markets and macroeconomic stability," MPRA Paper 13864, University Library of Munich, Germany. [Downloadable!]
Roy Cromb & Emilio Fernandez-Corugedo, . "Long-term interest rates, wealth and consumption," Bank of England working papers 243, Bank of England. [Downloadable!]

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