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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
DOI: 10.1016/j.jmacro.2013.01.003
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