IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Monetary policy and stock price dynamics with limited asset market participation

  • Airaudo, Marco
Registered author(s):

    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.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.sciencedirect.com/science/article/pii/S0164070413000104
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Elsevier in its journal Journal of Macroeconomics.

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

    as
    in new window

    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

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. 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.
    2. Schmitt-Grohé, Stephanie & Uribe, Martín, 2004. "Optimal Simple and Implementable Monetary and Fiscal Rules," CEPR Discussion Papers 4334, C.E.P.R. Discussion Papers.
    3. Jean Boivin & Marc P. Giannoni, 2003. "Has Monetary Policy Become More Effective?," NBER Working Papers 9459, National Bureau of Economic Research, Inc.
    4. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    5. Jordi Gali & David López-Salido & Javier Valles, 2004. "Understanding the effects of government spending on consumption," International Finance Discussion Papers 805, Board of Governors of the Federal Reserve System (U.S.).
    6. Bilbiie, Florin O. & Meier, André & Müller, Gernot J., 2006. "What accounts for the changes in U.S. fiscal policy transmission?," Working Paper Series 0582, European Central Bank.
    7. John H. Cochrane, 2007. "Determinacy and Identification with Taylor Rules," NBER Working Papers 13409, National Bureau of Economic Research, Inc.
    8. Kaushik Mitra & James Bullard, . "Learning About Monetary Policy Rules," Discussion Papers 00/41, Department of Economics, University of York.
    9. Honkapohja, Seppo & Evans, George W., 2000. "Expectations and the stability problem for optimal monetary policies," Discussion Paper Series 1: Economic Studies 2000,10, Deutsche Bundesbank, Research Centre.
    10. Bilbiie, Florin O., 2008. "Limited asset markets participation, monetary policy and (inverted) aggregate demand logic," Journal of Economic Theory, Elsevier, vol. 140(1), pages 162-196, May.
    11. Evans, George W. & McGough, Bruce, 2005. "Monetary policy, indeterminacy and learning," Journal of Economic Dynamics and Control, Elsevier, vol. 29(11), pages 1809-1840, November.
    12. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income and Interest Rates: Reinterpreting the Time Series Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 185-246 National Bureau of Economic Research, Inc.
    13. Ben Bernanke & Mark Gertler, 2000. "Monetary Policy and Asset Price Volatility," NBER Working Papers 7559, National Bureau of Economic Research, Inc.
    14. 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.
    15. Damjan Pfajfar & Emiliano Santoro, 2008. "Determinacy, Stock Market Dynamics and Monetary Policy Inertia," Discussion Papers 08-30, University of Copenhagen. Department of Economics.
    16. Kevin J. Lansing, 2003. "Should the Fed react to the stock market?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue nov14.
    17. Stephen G. Cecchetti & Hans Genberg & Sushil Wadhwani, 2002. "Asset Prices in a Flexible Inflation Targeting Framework," NBER Working Papers 8970, National Bureau of Economic Research, Inc.
    18. Chetty, Nadarajan & Weber, Andrea & Guren, Adam Michael & Day, Manoli, 2011. "Are Micro and Macro Labor Supply Elasticities Consistent? A Review of Evidence on the Intensive and Extensive Margins," Scholarly Articles 11878970, Harvard University Department of Economics.
    19. David Domeij & Martin Floden, 2006. "The Labor-Supply Elasticity and Borrowing Constraints: Why Estimates are Biased," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 242-262, April.
    20. repec:fth:harver:1435 is not listed on IDEAS
    21. Bennett T. McCallum, 2003. "Multiple-Solution Indeterminacies in Monetary Policy Analysis," NBER Working Papers 9837, National Bureau of Economic Research, Inc.
    22. Jordi Galí & J. David López Salido & Javier Vallés, 2003. "Rule-of-thumb consumers and the design of interest rate rules," Banco de Espa�a Working Papers 0320, Banco de Espa�a.
    23. Charles T. Carlstrom & Timothy Fuerst, 2007. "Asset Prices, Nominal Rigidities, and Monetary Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(2), pages 256-275, April.
    24. Peter N. Ireland, 2001. "Endogenous Money or Sticky Prices?," Boston College Working Papers in Economics 499, Boston College Department of Economics.
    25. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
    26. John H. Cochrane, 2009. "Can Learnability Save New-Keynesian Models?," NBER Working Papers 15459, National Bureau of Economic Research, Inc.
    27. Ben S. Bernanke & Mark Gertler, 2001. "Should Central Banks Respond to Movements in Asset Prices?," American Economic Review, American Economic Association, vol. 91(2), pages 253-257, May.
    28. Colciago, Andrea, 2005. "Rule of Thumb Consumers Meet Sticky Wages," MPRA Paper 3275, University Library of Munich, Germany, revised 27 Apr 2007.
    29. McCallum, Bennett T., 2009. "Inflation determination with Taylor rules: Is new-Keynesian analysis critically flawed?," Journal of Monetary Economics, Elsevier, vol. 56(8), pages 1101-1108, November.
    30. Olivier Blanchard & Roberto Perotti, 1999. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," NBER Working Papers 7269, National Bureau of Economic Research, Inc.
    31. Kevin J. Lansing, 2008. "Monetary policy and asset prices," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct31.
    32. McCallum, Bennett T., 2009. "Rejoinder to Cochrane," Journal of Monetary Economics, Elsevier, vol. 56(8), pages 1114-1115, November.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:eee:jmacro:v:36:y:2013:i:c:p:1-22. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.