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New Shocks and Asset Price Volatility in General Equilibrium

Listed author(s):
  • Alessandro Rebucci
  • Akito Matsumoto
  • Pietro Cova
  • Massimiliano Pisani

We study equity price volatility in general equilibrium with news shocks about future productivity and monetary policy. As West (1988) shows, in a partial equilibrium present discounted value model, news about the future cash flow reduces asset price volatility. We show that introducing news shocks in a canonical dynamic stochastic general equilibrium model may not reduce asset price volatility under plausible parameter assumptions. This is because, in general equilibrium, the asset cash flow itself may be affected by the introduction of news shocks. In addition, we show that neglecting to account for policy news shocks (e.g., policy announcements) can potentially bias empirical estimates of the impact of monetary policy shocks on asset prices.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/110.

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Length: 34
Date of creation: 01 May 2011
Handle: RePEc:imf:imfwpa:11/110
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  1. Glenn D. Rudebusch, 2005. "Monetary policy inertia: fact or fiction?," Working Paper Series 2005-19, Federal Reserve Bank of San Francisco.
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  9. Tommaso Monacelli, 1999. "Into the Mussa Puzzle: Monetary Policy Regimes and the Real Exchange Rate in a Small Open Economy," Boston College Working Papers in Economics 437, Boston College Department of Economics, revised 15 Sep 2000.
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  20. West, Kenneth D, 1988. "Dividend Innovations and Stock Price Volatility," Econometrica, Econometric Society, vol. 56(1), pages 37-61, January.
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  23. Okina, Kunio & Shiratsuka, Shigenori, 2004. "Policy commitment and expectation formation: Japan's experience under zero interest rates," The North American Journal of Economics and Finance, Elsevier, vol. 15(1), pages 75-100, March.
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  28. Frenkel, Jacob A, 1976. " A Monetary Approach to the Exchange Rate: Doctrinal Aspects and Empirical Evidence," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 200-224.
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