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Stock prices and monetary policy: Re-examining the issue in a New Keynesian model with endogenous investment

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  • Grossi, Michele
  • Tamborini, Roberto

Abstract

In this paper the authors present a New Keynesian quantitative model with endogenous investment and stock-market sector that may shed further light on two unsettled issues: whether central banks should include some financial indicator in their policy rules, and which indicator may be expected to generate better stabilization performance. For comparative purposes the authors replicate the policy framework and assessment strategy of the well-known no-inclusion model of BernankeGertler (Monetary Policy and Asset Price Volatility, 1999, and Should Central Banks Respond to Movements in Asset Prices? 2001). The performance of five policy rules is assessed. Two are traditional Taylor rules (i.e. with no financial indicators) that differ in the relative weight on the output and inflation gaps. Three are financial Taylor rules, that is, augmented with one financial indicator: the deviation from trend of stock prices, of Tobin's q (the rate of change stock prices relative to capital stock) and of investment. The authors show results that are at variance with BernankeGertler. First, because among the traditional rules the best performing one is output aggressive instead of inflation aggressive. Second, because the financial rule with Tobin's q outperforms the traditional inflation-aggressive one under all dimensions and cases. However, the authors cannot draw a univocal conclusion as regards the comparison between the financial rule with Tobin's q and the traditional but output aggressive rule.

Suggested Citation

  • Grossi, Michele & Tamborini, Roberto, 2012. "Stock prices and monetary policy: Re-examining the issue in a New Keynesian model with endogenous investment," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 6, pages 1-47.
  • Handle: RePEc:zbw:ifweej:201214
    DOI: 10.5018/economics-ejournal.ja.2012-14
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    Cited by:

    1. Francesco Saraceno & Roberto Tamborini, 2015. "How can it work? On the impact of quantitative easing in the Eurozone," DEM Working Papers 2015/03, Department of Economics and Management.
    2. repec:hal:spmain:info:hdl:2441/4ei7u710bj9par121c71ul9fdr is not listed on IDEAS
    3. Friedman, Benjamin M., 2012. "Rules versus discretion at the Federal Reserve System: On to the second century," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 608-615.
    4. repec:hal:spmain:info:hdl:2441/4ppcskgnsc8tmbhdrupis355j7 is not listed on IDEAS
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    6. Francesco Saraceno & Roberto Tamborini, 2015. "How can it work? On the impact of quantitative easing in the Eurozone," DEM Working Papers 2015/03, Department of Economics and Management.
    7. Ronny Mazzocchi, 2013. "Intertemporal Coordination Failure and Monetary Policy," DEM Discussion Papers 2013/15, Department of Economics and Management.
    8. Rudi Bratamanggala, 2018. "The Factors Affecting Board Stock Price of Lq45 Stock Exchange 2012-2016: Case of Indonesia," European Research Studies Journal, European Research Studies Journal, vol. 0(1), pages 115-124.

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    More about this item

    Keywords

    New Keynesian models; monetary policy; stock markets and bubbles;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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