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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. Jean-Bernard Chatelain & Kirsten Ralf, 2014. "Stability and Identification with Optimal Macroprudential Policy Rules," Papers 1404.3347, arXiv.org.
  2. Castelnuovo, Efrem & Nisticò, Salvatore, 2010. "Stock market conditions and monetary policy in a DSGE model for the U.S," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1700-1731, September.
  3. Fabio Milani, 2008. "Learning about the Interdependence between the Macroeconomy and the Stock Market," Working Papers 070819, University of California-Irvine, Department of Economics.
  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, vol. 12(2).
  5. Zervou, Anastasia S., 2013. "Financial market segmentation, stock market volatility and the role of monetary policy," European Economic Review, Elsevier, vol. 63(C), pages 256-272.
  6. repec:hal:cesptp:hal-00978145 is not listed on IDEAS

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