Optimal Monetary Policy and Stock-Prices Dynamics in a Non-Ricardian DSGE Model
AbstractIn a DSGE model with non-ricardian agents, a' la Blanchard-Yaari, stock-price fluctuations affect the dynamics of aggregate consumption through wealth effects. This wealth effects can be characterized as an additional dynamic distortion with respect to the social planner allocation, related to the cross sectional consumption dispersion that the decentralized allocation implies. By exploiting the specific cross-sectional distribution that the model implies for individual financial wealth, this paper derives the welfare criterion consistent with this economy, and shows that it features an additional target besides output-gap and price stability: financial stability. The ultimate implication is that price stability is no longer necessarily optimal, even absent cost push shocks. Given the quadratic form of the welfare criterion, some fluctuations in output and inflation will be optimal as long as they reduce the volatility of financial wealth.
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Bibliographic InfoPaper provided by Dipartimento di Economia e Finanza, LUISS Guido Carli in its series Working Papers CASMEF with number 1107.
Date of creation: 2011
Date of revision:
Monetary Policy; DSGE Models; Stock Prices; Wealth Effects.;
Find related papers by JEL classification:
- E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-02-27 (All new papers)
- NEP-CBA-2012-02-27 (Central Banking)
- NEP-DGE-2012-02-27 (Dynamic General Equilibrium)
- NEP-MAC-2012-02-27 (Macroeconomics)
- NEP-MON-2012-02-27 (Monetary Economics)
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- Nisticò, Salvatore, 2012.
"Monetary policy and stock-price dynamics in a DSGE framework,"
Journal of Macroeconomics,
Elsevier, vol. 34(1), pages 126-146.
- Salvatore Nisticò, 2012. "Monetary Policy and Stock-Price Dynamics in a DSGE Framework," CSEF Working Papers 307, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
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