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Monetary Policy and Stock-Price Dynamics in a DSGE Framework

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  • Salvatore Nisticò

    (Università degli Studi di Roma “La Sapienza" and LUISS Guido Carli)

Abstract

This paper analyzes the role of stock prices in driving Monetary Policy for price stability in a Non-Ricardian DSGE model. It shows that the dynamics of the interest rate consistent with price stability requires a response to stock-price changes that depends on the shock driving them: a supply shock (e.g. productivity) does not require an additional, dedicated response relative to the standard Representative-Agent framework, while a demand shock does. Moreover, we show that implementing the exible-price allocation by means of an interest-rate rule that reacts to deviations of the stock-price level from the exible-price equilibrium incurs risks of endogenous instability that are the higher the less profitable on average equity shares. On the other hand, reacting to the stock-price growth rate is risk-free from the perspective of equilibrium determinacy, and can be beneficial from an overall real stability perspective.

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Bibliographic Info

Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 307.

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Date of creation: 10 Feb 2012
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Handle: RePEc:sef:csefwp:307

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Keywords: Monetary Policy; DSGE Models; Stock Prices; Wealth Effects.;

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  1. Marcus Miller & Paul Weller & Lei Zhang, 2002. "Moral Hazard and the US Stock Market: Analysing the "Greenspan Put"," Economic Journal, Royal Economic Society, vol. 112(478), pages C171-C186, March.
  2. Chadha, Jagjit S & Sarno, Lucio & Valente, Giorgio, 2003. "Monetary Policy Rules, Asset Prices and Exchange Rates," CEPR Discussion Papers 4114, C.E.P.R. Discussion Papers.
  3. Vasco Curdia & Michael Woodford, 2008. "Credit Frictions and Optimal Monetary Policy," Discussion Papers 0809-02, Columbia University, Department of Economics.
  4. Lippi, Francesco & Neri, Stefano, 2003. "Information Variables for Monetary Policy in a Small Structural Model of the Euro Area," CEPR Discussion Papers 4125, C.E.P.R. Discussion Papers.
  5. Barbara Annicchiarico & Giancarlo Marini & Alessandro Piergallini, 2008. "Monetary Policy and Fiscal Rules," The B.E. Journal of Macroeconomics, De Gruyter, vol. 8(1), pages 4.
  6. Vasco Curdia & Michael Woodford, . "The Central-Bank Balance Sheet as an Instrument of Monetary Policy," Discussion Papers 0910-19, Columbia University, Department of Economics.
  7. Salvatore Nistico', 2011. "Optimal Monetary Policy and Stock-Prices Dynamics in a Non-Ricardian DSGE Model," Working Papers CASMEF 1107, Dipartimento di Economia e Finanza, LUISS Guido Carli.
  8. Darrin R. Halcomb & Syed Shah Saeed Hussain, 2002. "Asset price bubbles: implications for monetary, regulatory, and international policies," Chicago Fed Letter, Federal Reserve Bank of Chicago, issue Sep.
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Citations

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Cited by:
  1. Giorgio Di Giorgio & Salvatore Nistic�, . "Fiscal Deficits, Current Account Dynamics and Monetary Policy," Working Papers 8, Department of the Treasury, Ministry of the Economy and of Finance.
  2. Fabio Milani, 2008. "Learning about the Interdependence between the Macroeconomy and the Stock Market," Working Papers 070819, University of California-Irvine, Department of Economics.
  3. Fratzscher, Marcel & Straub, Roland, 2010. "Asset Prices, News Shocks and the Current Account," CEPR Discussion Papers 8080, C.E.P.R. Discussion Papers.

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