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New Shocks and Asset Price Volatility in General Equilibrium

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Author Info

  • Alessandro Rebucci
  • Akito Matsumoto
  • Pietro Cova
  • Massimiliano Pisani

Abstract

We study equity price volatility in general equilibrium with news shocks about future productivity and monetary policy. As West (1988) shows, in a partial equilibrium present discounted value model, news about the future cash flow reduces asset price volatility. We show that introducing news shocks in a canonical dynamic stochastic general equilibrium model may not reduce asset price volatility under plausible parameter assumptions. This is because, in general equilibrium, the asset cash flow itself may be affected by the introduction of news shocks. In addition, we show that neglecting to account for policy news shocks (e.g., policy announcements) can potentially bias empirical estimates of the impact of monetary policy shocks on asset prices.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/110.

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Length: 34
Date of creation: 01 May 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/110

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Keywords: Productivity; Economic models; External shocks; Stock prices; news; monetary policy; money supply; money demand; monetary economics; money stock; inflation; optimal monetary policy; monetary fund; communications; monetary shocks; monetary authority; signals; money balances; monetary response; optimal ? monetary policy; publishing; press; monetary approach; central bank; monetary policy regimes; discount rate; money market; monetary policy rules; monetary policy rule; money balance; monetary reaction function;

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References

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  1. Andr? Kurmann & Christopher Otrok, 2013. "News Shocks and the Slope of the Term Structure of Interest Rates," American Economic Review, American Economic Association, vol. 103(6), pages 2612-32, October.
  2. Jan J J Groen & Akito Matsumoto, 2004. "Real exchange rate persistence and systematic monetary policy behaviour," Bank of England working papers 231, Bank of England.
  3. Robert B. Barsky & Eric R. Sims, 2009. "News Shocks," NBER Working Papers 15312, National Bureau of Economic Research, Inc.
  4. Ippei Fujiwara & Yasuo Hirose & Mototsugu Shintani, 2009. "Can News Be a Major Source of Aggregate Fluctuations? A Bayesian DSGE Approach," Vanderbilt University Department of Economics Working Papers 0921, Vanderbilt University Department of Economics.
  5. Gilchrist, Simon & Leahy, John V., 2002. "Monetary policy and asset prices," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 75-97, January.
  6. Lars E.O. Svensson & Stefan Laseen, 2009. "Anticipated Alternative Instrument-Rate Paths in Policy Simulations," 2009 Meeting Papers 788, Society for Economic Dynamics.
  7. Michael B. Devereux & Charles Engel, 2006. "Expectations and Exchange Rate Policy," NBER Working Papers 12213, National Bureau of Economic Research, Inc.
  8. Blinder, Alan S. & Ehrmann, Michael & de Haan, Jakob & Fratzscher, Marcel & Jansen, David-Jan, 2008. "Central Bank communication and monetary policy: a survey of theory and evidence," Working Paper Series 0898, European Central Bank.
  9. Heathcote, Jonathan & Perri, Fabrizio, 2002. "Financial autarky and international business cycles," Journal of Monetary Economics, Elsevier, vol. 49(3), pages 601-627, April.
  10. Beaudry, Paul & Portier, Franck, 2001. "An Exploration into Pigou's Theory of Cycles," CEPR Discussion Papers 2996, C.E.P.R. Discussion Papers.
  11. Benigno, Gianluca, 2004. "Real exchange rate persistence and monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 473-502, April.
  12. Toshitaka Sekine & Yuki Teranishi, 2008. "Inflation Targeting and Monetary Policy Activism," IMES Discussion Paper Series 08-E-13, Institute for Monetary and Economic Studies, Bank of Japan.
  13. Okina, Kunio & Shiratsuka, Shigenori, 2004. "Policy commitment and expectation formation: Japan's experience under zero interest rates," The North American Journal of Economics and Finance, Elsevier, vol. 15(1), pages 75-100, March.
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Cited by:
  1. Beaudry, Paul & Portier, Franck, 2013. "News Driven Business Cycles: Insights and Challenges," CEPR Discussion Papers 9624, C.E.P.R. Discussion Papers.

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