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Monetary policy and stock price dynamics with limited asset market participation

  • Airaudo, Marco

We study a New-Keynesian DSGE model subject to limited asset market participation (LAMP) and assess whether monetary policy should respond to stock prices for what concerns the determinacy and the learnability (E-stability) of the Rational Expectations Equilibrium (REE). We find that interest rate rules granting a positive response to stock prices facilitate both the determinacy and the E-stability of the fundamental REE when the degree of LAMP is sufficiently large to generate an inverted aggregate demand channel of monetary policy transmission. Moreover, according to our analysis, policy rules responding to stock prices appear to perform better than more standard rules responding to output with respect to both equilibrium determinacy and aggregate welfare.

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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 36 (2013)
Issue (Month): C ()
Pages: 1-22

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Handle: RePEc:eee:jmacro:v:36:y:2013:i:c:p:1-22
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

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  1. John H. Cochrane, 2007. "Determinacy and Identification with Taylor Rules," NBER Working Papers 13410, National Bureau of Economic Research, Inc.
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  15. George W. Evans & Bruce McGough, 2003. "Monetary Policy, Indeterminacy and Learning," University of Oregon Economics Department Working Papers 2003-34, University of Oregon Economics Department, revised 01 Apr 2004.
  16. Bennett T. McCallum, 2003. "Multiple-Solution Indeterminacies in Monetary Policy Analysis," NBER Working Papers 9837, National Bureau of Economic Research, Inc.
  17. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
  18. Annette Vissing-Jorgensen, 2002. "Limited Asset Market Participation and the Elasticity of Intertemporal Substitution," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 825-853, August.
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  28. repec:fth:harver:1435 is not listed on IDEAS
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