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Stock Prices And Monetary Policy Shocks: A General Equilibrium Approach

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  • Edouard Challe

    (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, Banque de France - -, CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique)

  • Chryssi Giannitsarou

    (University of Cambridge - Faculty of Economics, CEPR - Center for Economic Policy Research - CEPR)

Abstract

Recent empirical literature documents that unexpected changes in the nominal interest rates have a significant effect on real stock prices: a 25-basis point increase in the nominal interest rate is associated with an immediate decrease in broad real stock indices that may range from 0.6 to 2.2 percent, followed by a gradual decay as real stock prices revert towards their long-run expected value. In this paper, we assess the ability of a general equilibrium New Keynesian asset-pricing model to account for these facts. The model we consider is a production economy with elastic labor supply, staggered price and wage setting, as well as time-varying risk aversion through habit formation. We find that the model predicts a stock market response to policy shocks that matches empirical estimates, both qualitatively and quantitatively. Our findings are robust to a range of variations and parameterizations of the model.

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Paper provided by HAL in its series Working Papers with number hal-00719956.

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Date of creation: 23 Jul 2012
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Handle: RePEc:hal:wpaper:hal-00719956

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Keywords: Monetary policy; Asset prices; New Keynesian general equilibrium model;

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Cited by:
  1. Zervou, Anastasia S., 2013. "Financial market segmentation, stock market volatility and the role of monetary policy," European Economic Review, Elsevier, Elsevier, vol. 63(C), pages 256-272.
  2. Jean-Bernard Chatelain & Kirsten Ralf, 2014. "Stability and Identification with Optimal Macroprudential Policy Rules," Documents de travail du Centre d'Economie de la Sorbonne, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne 14034, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  3. Efrem Castelnuovo & Salvatore Nisticò, 2010. "Stock Market Conditions and Monetary Policy in a DSGE Model for the U.S," "Marco Fanno" Working Papers 0107, Dipartimento di Scienze Economiche "Marco Fanno".
  4. Rangan GUPTA & Roula INGLESI-LOTZ, 2012. "Macro Shocks and Real US Stock Prices with Special Focus on the “Great Recession”," Applied Econometrics and International Development, Euro-American Association of Economic Development, Euro-American Association of Economic Development, vol. 12(2).
  5. Fabio Milani, 2008. "Learning about the Interdependence between the Macroeconomy and the Stock Market," Working Papers 070819, University of California-Irvine, Department of Economics.

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