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Why Don't the Prices of Stocks and Bonds Move Together?

  • Barsky, Robert B

The 1970s were associated with very low real interest rates and a large drop in equity values relative to dividends and earnings. This paper explores the possible roles of increased risk and reduced productivity growth in accounting for the behavior of bond and stock prices in a simple general equilibrium model. Both disturbances unambiguously lower the riskless interest rate, but may cause the stock market to respond perversely depending on the degree of aversion to intertemporal substitution and the share of the corporate sector in total wealth. Copyright 1989 by American Economic Association.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 79 (1989)
Issue (Month): 5 (December)
Pages: 1132-45

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Handle: RePEc:aea:aecrev:v:79:y:1989:i:5:p:1132-45
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  13. James M. Poterba, 1983. "Tax Subsidies to Owner-occupied Housing: An Asset Market Approach," Working papers 339, Massachusetts Institute of Technology (MIT), Department of Economics.
  14. John Y. Campbell & Robert J. Shiller, 1986. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," NBER Working Papers 2100, National Bureau of Economic Research, Inc.
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  19. Greenwood, Jeremy & Huffman, Gregory W., 1987. "A dynamic equilibrium model of inflation and unemployment," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 203-228, March.
  20. Fama, Eugene F, 1976. "Inflation Uncertainty and Expected Returns on Treasury Bills," Journal of Political Economy, University of Chicago Press, vol. 84(3), pages 427-48, June.
  21. Brock, William A., 1980. "Asset Prices in a Production Economy," Working Papers 275, California Institute of Technology, Division of the Humanities and Social Sciences.
  22. Campbell, John, 1986. "Bond and Stock Returns in a Simple Exchange Model," Scholarly Articles 3122544, Harvard University Department of Economics.
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  25. N. Gregory Mankiw & David Romer & Matthew D. Shapiro, 1985. "An Unbiased Reexamination of Stock Market Volatility," Cowles Foundation Discussion Papers 758, Cowles Foundation for Research in Economics, Yale University.
  26. Olivier J. Blanchard & Lawrence H. Summers, 1984. "Perspectives on High World Real Interest Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 15(2), pages 273-334.
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  29. Donaldson, John B & Mehra, Rajnish, 1984. "Comparative Dynamics of an Equilibrium Intertemporal Asset Pricing Model," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 491-508, July.
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